Late last week, Bank of Japan's (BOJ) move to impose a negative interest rate for the first time in its history took the markets by surprise.
Global economic woes - the decline in crude oil prices and weak data from emerging and other export-based countries including China - led to the move. The BOJ's step helps the third-largest country in the world to get closer to its target inflation rate of 2%. It is an effort to boost confidence and spending by companies and households.
The BOJ Governor Haruhiko Kuroda has stated that there is no limit to efforts for easing monetary policy. The central bank may further expand asset purchases if required.
Sub-zero interest rate measures are nothing new. Last year, the European Central Bank (ECB) had cut down interest rates to negative to lower borrowing costs, encourage bank lending and combat deflation. Denmark, Sweden and Switzerland adopted a similar measure in the past.
Meanwhile, the ECB has hinted on further policy easing in its March 2016 meeting. It is expected that the ECB may further cut interest rates in response to persistently low inflation and volatility in the financial markets. The ECB president Mario Draghi identified turbulence in global markets along with plummeting oil prices as a contributing cause for Eurozone's low inflation.
Real Estate Stands to Benefit
Interest rates have a profound effect on credit availability and cost of real estate mortgages. A low interest rate environment improves an individual's ability to purchase properties by reducing the cost of mortgage capital, thereby boosting demand. A favorable consumer spending scenario and strong recovery plan could play an important role in boosting the housing market.
Given this, investors may take advantage by investing in real estate ETFs based in Japan such as the WisdomTree Japan Hedged Real Estate ETF (NYSEARCA:DXJR). The fund tracks the performance of the WisdomTree Japan Hedged Real Estate Index, thereby providing exposure to the Japanese Real Estate sector.
The fund also hedges exposure to fluctuations between the U.S. dollar and the yen. Thus, this ETF appears to be a strong bet at a time of significant foreign exchange fluctuation. The ETF charges 48 bps in fees and gained 6.2% in the last 5 days (as of February 3, 2016). The fund currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook, suggesting that it will outperform the broad market funds in the coming months.