Japan ETFs Back in Focus After Abe Speech

June 5th at 2:35am by Tom Lydon

Exchange traded funds tracking Japan, one of this year’s most popular and, more recently, volatile sub-segments of the ETF universe, are sure to be in focus against Wednesday after a highly anticipated speech by Japanese Prime Minister Shinzo Abe. The speech was delivered during Wednesday’s Asian session.

With the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) down 18.4% since early December, Abe has, at least for the moment, accomplished his goal of weakening the yen to bolster Japanese exporters. Abe has also proven successful in getting the Bank of Japan to adopt his goal of raising Japan’s rate of inflation to 2% over the next two years.

The so-called “third arrow” in Abe’s quiver is raising Japanese incomes to foster increased domestic demand. In his speech, Abe said “the government would aim to raise per capita gross national income by 3 percent or more a year over the next decade and double inward foreign direct investment to 35 trillion yen by 2020,” CNBC reported.

What that means for Japan ETFs over the long-term remains to be seen, but highly popular funds such as the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and iShares MSCI Japan (NYSEArca: EWJ) could use a boost. DXJ is down almost 11% since May 20 while EWJ is down 9.6% over the same time as the yen has strengthened. [WisdomTree Japan ETF Down Nearly 20%]

Despite the recent increase in volatility, Japan ETFs remain popular with investors. On a global basis, Japan equity ETPs gathered a monthly record $10.2 billion during May. Year-to-date flows have also reached record-setting territory at $23.1 billion, or 22.9% of all equity ETP flows. The pace of Japan ETP flows so far in 2013 is already more than double the levels seen annually in both 2011 and 2012, according to BlackRock. [ETF Flows on Pace to Break $200 Billion]

Rising wages are pivotal to Abe’s goals of boosting inflation in a bid to stem a deflationary tide that has lasted almost two decades. Higher incomes could prove necessary if the yen continues to weaken, a source of concern for Japanese companies and consumers. The weak currency is good for exporters, but not for importers and consumers that purchase imported goods.

Markets seemed unimpressed by Abe’s speech. Prior to his remarks, the U.S. Dollar/Japanese yen pair traded as high as 100.47. At this writing at 2:15 AM Eastern time, the pair is down 0.55% at 99.53. That could put added stress on DXJ, which due to its hedged currency component, benefits when USD/JPY rises.

WisdomTree Japan Hedged Equity Fund

 

ETF Trends editorial team contributed to this piece.

 

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.

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