An ETF that invests in Japan but hedges its exposure to the yen has seen trading and assets spike on expectations the new prime minister will force the Bank of Japan to weaken the currency.
The rush of money into WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) has pushed the fund above $1 billion in assets.
Since Nov. 15, DXJ has posted net inflows of $352 million, according to IndexUniverse data.
Shinzo Abe, the new Japanese prime minister, has pledged to pressure the Bank of Japan to launch unlimited monetary easing to revive the economy. The move is seen as potentially bullish for Japanese stocks and bearish for the yen. [ETF for Higher Japanese Stocks and a Weaker Yen]
DXJ invests in Japan equities but hedges its currency exposure. Other ETFs such as iShares MSCI Japan (NYSEArca: EWJ) face a headwind when the yen weakens against the dollar.
CurrencyShares Japanese Yen Trust (NYSEArca: FXY) is down more than 7% the past three months. During that period, DXJ is up 12.1% while EWJ has gained 5.2%, according to Morningstar. The disparity illustrates that currency hedging can have a meaningful impact on performance.
Trading volume in DXJ has jumped in the second half of December. On Dec. 13 alone, volume skyrocketed to about 5 million shares, up from a daily average of about 300,000 shares, according to Paul Weisbruch at Street One Financial.
Many portfolio managers are playing the “bullish Japanese equity, bearish Japanese yen currency” theme due to the election.
“The thought process here is that a regime change in the Japanese government may result in monetary policies that would lean towards this investment theme,” he said.
Abe, the incoming prime minister, has threatened to revise the law governing the Bank of Japan if it refuses to introduce a 2% inflation target at its January policy meeting, the Financial Times reports.
Abe’s comments “highlight his determination to push the BoJ to adopt a more aggressive monetary policy in an effort to end chronic deflation and boost economic growth,” the FT said.
WisdomTree Japan Hedged Equity Fund