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Unexpected modifications in the quantitative easing program by Bank of Japan (BOJ) on Friday helped the Japanese currency yen to move higher against the U.S. dollar. BOJ took some moderate steps to boost the sluggish Japanese economy and achieve its inflation target rate. Following the announcement, the yen gained nearly 1.2% against the dollar. BOJ’s New Steps in Focus Japan’s central bank announced a number of judicious changes without expanding the volume of its annual asset purchasing program it has been following for the last three years. Though it maintained the volume of bond purchasing at around 80 trillion yen ($660 billion) per year, the bank opted for raising the Japanese government bonds’ (JGBs) average maturity from 7-10 years to 7-12 years. The bank also revealed its plan of purchasing all JGBs to be issued next year. BOJ also announced that under this program, it will allocate 300 billion yen of assets annually in purchasing ETFs that seek to follow the JPX-Nikkei Index 400, which comprises companies that carry out operation without violating the corporate-governance criteria. The central bank’s intention was to boost capital expenditure and wages – an important parameter of an economy – through this step. This was in addition to the BOJ’s annual allocation of 3 trillion yen in ETFs, which started in late 2014. Will It Work? The changes in economic stimulus came on the back of concerns that BOJ’s quantitative easing program that started three years ago has done little for the economy. Despite the bond purchasing program – popularly known as Abenomics – that had aimed at achieving economic growth, the economy slid into contraction territory in the second quarter with a year-on-year GDP decline of 0.5%. However, according to the latest estimate, the economy rebounded strongly in the last quarter to witness a GDP growth rate of 1%, contrary to the earlier estimate of a contraction of 0.8%. Meanwhile, it was reported that the output expanded at an annual pace of 1.6% in the last three quarters. Also, spending by households in the last quarter saw an increase of 0.5%, indicating that the QE program is not a complete failure. Though the bank’s inflation target of 2% has not yet been achieved, BOJ indicated that it will do whatever it takes to reach the goal. Haruhiko Kuroda, Governor of BOJ said: “I’d like you to understand that we have taken those measures so we will be able to quickly adjust policy if we ever reach a conclusion that [further] action is needed to achieve the price-stability target at an early time.” He even added: “If risks to growth and price rises materialize, and if additional easing becomes necessary as a result, I certainly think we will have to undertake bold measures.” Yen ETF – FXY Gains Divergence in economic policies between the two major economies, the U.S. and Japan, played an important role in boosting the yen against the U.S. dollar on Friday. Last week, the Fed announced the first rate hike in almost a decade. The Fed finally pulled the trigger, raising benchmark interest rates by a modest 25 bps to 0.25-0.50% for the first time since 2006. Like the yen, CurrencyShares Japanese Yen ETF (NYSEARCA: FXY ) that tracks the value of the yen against the price of the greenback also gained 1.2% on Friday following the BOJ announcement. This $252.8 million fund charges 40 basis points as fees. FXY also returned 0.9% in the past six months as the yen, which is considered a classic safe haven asset continue to attract investor focus. FXY has a Zacks ETF Rank #3 (Hold) with a High risk outlook. Apart from FXY, popular Japanese ETFs such as iShares MSCI Japan (NYSEARCA: EWJ ), WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) and Deutsche X-trackers MSCI Japan Hedged Eq (NYSEARCA: DBJP ) will also remain on investors’ radar in the coming months as they will track the prospect of the changes in economic stimulus. However, EWJ, DXJ and DBJP declined 1.3%, 2.7% and 2.6%, respectively, following the yen’s gain. Scalper1 News
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