The Bank of Japan (BOJ) voted 7-1 earlier today to end its super-easy monetary policy but it will "encourage the uncollateralized overnight call rate to remain at effectively zero percent." This move was much anticipated and more a matter of when, than if it would be made. Some had expected the BOJ to put off a decision until after the new fiscal begins in April, especially with pressure from PM Koizumi warning about not acting in haste to revise monetary policy.
So what does this mean for investors? For those investing in ETFs such as iShares MSCI Japan Index (EWJ) it doesn't mean too much since these funds' holdings are primarily large-cap and relatively stable stocks. For those with exposure to smaller-cap stocks it could spell trouble since the cost of borrowing will increase (gradually) and since Japanese investors/traders have exploited low cost margin borrowing, it could result in a large number of positions being sold off and money exiting the market. Additionally, the corporate cost of debt financing will seemingly increase incrementally across the board but smaller-cap companies will inherently be at a disadvantage.
How would I play this BOJ decision which sent the Nikkei 225 Stock Average up 2.6% yesterday? Keep an eye on financial stocks such as Mitsubishi UFJ Financial Group (MTU), Nomura Holdings (NMR) and ORIX (IX). Also continue to watch for volatility and down days when the dollar is bought against the yen -- these are buying opportunities if you are long EWJ, ITF, VPL or a large-cap Japan mutual fund investor.
Mitsubishi UFJ Fin. Grp. (Tokyo: 8306) added 1.82%, Nomura Holdings (Tokyo: 8604) gained 0.66%, and ORIX (Tokyo: 8591) closed 2.91% higher at today's closing in Tokyo.
Click here for a link to the full-text statement of the BOJ's decision.
Click here for a BOJ statement on "The Introduction of a New Framework for the Conduct of Monetary Policy" discussing price stability.
EWJ 1-yr chart:
MTU 1-yr chart:
NMR 1-yr chart:
IX 1-yr chart: