Amid rising speculation about a possible interest rate hike from Japan by the end of the year, MERITZ Securities will launch four related Exchange-Traded Notes (ETNs) this month, including a product that inversely tracks Japan's 10-year Government Bonds three times. This is a proactive response to Japan's interest rate hike.
MERITZ Securities, which first introduced ETN products in 2021, has shown rapid growth, capturing the top market share after surpassing Samsung Securities in May. As of the 2nd of this month, the total aggregate value of MERITZ Securities ETNs is 2.57 trillion won, ahead of Samsung Securities (2.32 trillion won), Shinhan Investment Corp. (2.16 trillion won), Korea Investment & Securities (2.06 trillion won), and Mirae Asset Securities (1.45 trillion won).
Through this ETN launch, MERITZ Securities aims to capitalize on a decline in Government Bonds prices while also benefiting from the appreciation of the yen (currency exposure). This marks the first investment product in Japan's Government Bonds within the domestic ETN market.
ETNs are products that track the fluctuations of specific assets or asset indices, issued by securities firms based on their creditworthiness, which distinguishes them from ETFs managed by asset management companies. Currently, the ETN market is only about one-tenth the size of the ETF market; however, ETNs can form a base index with just five or more categories and do not require holding physical assets directly. This makes ETNs advantageous for launching a variety of products.
According to the financial investment industry on the 4th, MERITZ Securities is undergoing preliminary review from the Korea Exchange for the launch of the 'MERITZ Inverse Japan Government Bonds 10-Year', 'MERITZ Inverse 3X Japan Government Bonds 10-Year', 'MERITZ Japan Government Bonds 10-Year', and 'MERITZ 3X Leverage Japan Government Bonds 10-Year' ETNs. If approved, they are expected to be launched on the 30th of this month. The initial issuance amount will be 10 billion won each, totaling 40 billion won.
MERITZ Securities initially planned to focus on inverse ETNs betting on a decline in Government Bonds prices. However, current regulations require that an inverse product must be launched alongside a forward ETN.
Currently, the only product investing in Japanese Government Bonds in the Exchange-Traded Products (ETP) market is Hanwha Asset Management's 'PLUS Japan Yen Ultra-Short Government Bonds' Exchange-Traded Fund (ETF). Based on medium- to long-term Japanese Government Bonds, this is the first product in the combined ETF and ETN markets.
The Bank of Japan (BOJ) raised the policy interest rate to 0.5% in January of this year, but due to increased economic uncertainty arising from the tariffs imposed by the Trump administration, it held the rate steady for three consecutive times until the 17th of last month.
However, analysis indicates that the possibility of an interest rate hike by year-end has increased as inflation remains uncontained. The Consumer Price Index (CPI) announced on the 20th of last month rose by 3.7% compared to the same period last year, marking the highest level since the beginning of 2023. Notably, rice prices surged by 102% during the same period.
The BOJ has expressed its stance that it may raise interest rates. BOJ Governor Kazuo Ueda said last month, 'Since real interest rates are at a very low level, we will continue to increase the policy rate and adjust the level of monetary easing in response to improvements in the economy and price conditions.'
In this context, MERITZ Securities has recently focused on the heightened volatility of long-term Japanese bond rates. As of the 3rd, the yield on Japan's 10-year Government Bonds is 1.44%, whereas the 30-year rate is more than double at 2.96%. This contrasts with the yields on 10-year and 30-year U.S. Government Bonds, which are 4.25% and 4.79%, respectively, showing little difference. In Korea, the yields on 10-year and 30-year Government Bonds are 2.82% and 2.72%, respectively, indicating that the 30-year rate is actually lower.
Cho Min-am, head of the ETP Trading Team at MERITZ Securities, noted, 'Unlike other countries, the significant yield gap between Japan's 10-year and 30-year Government Bonds reflects market expectations that future rates could rise significantly.' He added, 'We anticipate that the BOJ will raise rates to around 1% by next year, and we determined that a product capable of actively responding to these market conditions is necessary, thus planning the launch of related ETNs.'
As the four ETNs are currency-exposed products, they have the advantage that regardless of investment direction, if interest rates rise and the yen strengthens, all will benefit. Investors who were previously investing in Japanese ultra-short bonds can reap returns exceeding 1% above the policy rate with the 'MERITZ Japan Government Bonds 10-Year' ETN while also gaining foreign exchange profits. However, this product does not include separate dividends, and capital gains will be subject to a 15.4% dividend income tax. Additionally, if annual income exceeds 20 million won, it may be subject to comprehensive taxation on financial income, which could be unfavorable for high-net-worth investors.
Including this launch, MERITZ Securities is strengthening its market competitiveness by releasing a total of ten ETNs this year. This accounts for 20% of the total ETNs issued this year (50 total).