Japan's financial markets are witnessing a shift as the country's benchmark 10-year government bond yield climbed to 1.575% on Monday, the highest level since 2008. This sharp rise follows data showing the fastest wage growth in more than three decades, strengthening expectations of further interest rate hikes by the Bank of Japan (BOJ).

With higher interest rates on the horizon, investors are evaluating Japan-focused ETFs to capitalize on these market shifts. Here are some key ETFs to watch:

iShares MSCI Japan Value ETF (NASDAQ:EWJV)

Generally, value stocks thrive better in a rising interest rates environment than growth stocks. In this scenario, investing in iShares MSCI Japan Value ETF could bode well. The ETF has gained 7.08% this year thus far. Value stocks tend to perform well in a high-rate environment as they are less reliant on borrowing and hence have stronger balance sheets.

Also Read: Rising Inflation In Japan: 3 ETFs To Watch As BOJ Navigates Rate Hike Expectations

iShares MSCI Japan Small Cap ETF (NYSE:SCJ)

A likely moderately stronger yen could be favorable for small-cap Japanese stocks, which are less reliant on exports compared to large-cap firms. An ETF to watch in this space is iShares MSCI Japan Small Cap ETF, which is up 5.77% year-to-date.

Invesco CurrencyShares Japanese Yen Trust (NYSE:FXY)

BOJ's Policy Path And Market Predictions

The BOJ put an end to its decade-long monetary stimulus in 2024 and raised short-term interest rates to 0.5% from 0.25% in January 2025. This decision stemmed from Japan's progress toward achieving a sustainable 2% inflation target.

According to Bloomberg, JPMorgan Chase & Co. has raised its year-end forecast for the 10-year Japanese government bond yield from 1.55% to 1.7%, with some investors predicting the yield could climb as high as 2%, quoted Yahoo Finance.

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