Currency-Hedged ETF Falls with Japan Stocks, Higher Yen

February 8th at 9:02am by Tom Lydon

WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) has been getting a lot of press lately with the ETF’s currency-hedged strategy is in the sweet spot as Japanese stocks rally and the yen plumbs multiyear lows.

However, DXJ was falling harder than unhedged ETFs on Friday morning as the yen strengthened versus the U.S. dollar.

Yet the recent trend for DXJ and other Japan equity ETFs has been higher as Shinzo Abe takes over as prime minister. He plans on following through with devaluing the yen to boost Japan’s exporters and struggling economy.

“The Japanese equity markets have been in a bear market or sideways market since 2006-07 so the optimism could lead to real momentum, if change is successfully implemented by the new government,” Daniel Weiskopf, a principal at Forefront Capital in New York, said in a report this week. [Specialized Japan ETF Doubles in Size as Yen Weakens]

The Bank of Japan Governor Masaaki Shirakawa announced he is going to resign early, before his term ends. Prime Minster Shinzo Abe will be appointed as early as next week, and will follow through with promises to weaken the yen, reports Trang Ho for Investor’s Business Daily.

The yen focused Guggenheim CurrencyShares Japanese Yen Trust (NYSEArca: FXY) has already plunged 19% over the past year, signifying the dip in value of the currency. FXY was up more than 1% in Friday’s premarket. [Japanese Yen ETFs and the Carry Trade]

Meanwhile, DXJ was off 1.4% before the bell. The ETF has soared nearly 30% the past three months on rising Japanese stocks and a falling yen.

The unhedged iShares MSCI Japan Index (NYSEArca: EWJ) recently hit a 10-month high, reports Ho. Investors can expect Japanese equities to make gains as the currency loses steam. The safe haven appeal of the yen is diminishing as the economic stimulus settles in.

The Bank of Japan is spending around $145 billion per month for the quantitative easing plan. The US Federal Reserve is spending about $85 billion per month on open market asset purchases, in comparison, reports Tony Sagami for Uncommon Wisdom. [Weaker Yen Gives Japanese Equity ETFs a Chance in 2013]

“This year is a case in point: through Feb. 5, Japanese stocks are up only 1.2% in dollar terms despite a 9.3% advance when measured in yen,” Alec Young of S&P Capital IQ said. “This leaves Japan trailing the broader MSCI EAFE Index’s 4% gain.”

The new government is planning on creating enough money to pull Japan out of the deflationary pattern and into an inflationary environment to push the yen’s value lower. For now, Japanese equity-focused ETFs are reacting positively.

Other Japan equity ETFs:

  • iShares Japan Small Cap Index (NYSEArca:SCJ)
  • iShares S&P/Topix 150 (NYSEArca: ITF)
  • SPDR Russell/Nomura PRIME Japan (NYSEArca: JPP)
  • SPDR Russell/Nomura Small Cap Japan (NYSEArca: JSC)
  • WisdomTree Global Ex-U.S. Growth (NYSEArca: DNL)
  • WisdomTree Japan Small-Cap Dividend (NYSEArca: DFJ)
WisdomTree Japan Hedged Equity Fund
EWJ, DXJ, FXY, Japan, Japanese yen, Currency ETFs, SCJ, ITF, JPP, JSC, DNL, DFJ

 

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.