On this front, we have recently seen very positive developments and a shift in sentiment. The change in tone is coming from an election set to take place on December 16, which Shinzo Abe, leader of the Liberal Democratic Party, is projected to win. [Japanese Yen ETF Falls Before Election]
Abe, a former prime minister, has vowed to weaken the nation’s currency and boost government spending to stimulate the economy. The specific rhetoric getting the most attention has been Abe’s call for “unlimited easing from the central bank to weaken the yen.”
Many of the nation’s exporters have started to see their stocks react very positively on speculation that the yen’s very outsized strength over the past five years may be set to reverse course with an Abe victory in the December 16 election.4
Given this potential shift the yen may have started, it is all the more interesting that on November 30, 2012, WisdomTree implemented a special, one-time rebalance of the Japan Hedged Equity Index (NYSEArca: DXJ) to focus more weight on Japan’s global multinational exporters. [ETF for Higher Japanese Stocks, Lower Yen]
I believe the currency-hedged nature of this Index calls for a tilt to companies that would benefit from a weaker yen; we thus added a new filter to the Index to remove from inclusion companies that were primarily operating locally in Japan. This filter specifically focuses on companies that derive more than 80% of their revenue from Japan. To see a more detailed analysis of the shift that occurred as a result of this Index enhancement, please see this research piece.
In closing, I believe Japan’s stocks are attractively priced, but we need to see the yen continue to move downward to keep the momentum going for Japan’s stocks. The election on December 16 could be a very helpful catalyst.
Jeremy Schwartz is director of research at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.
1Source: Roben Farzad, “Japanese Stocks? Yes, They Really Think So,” Bloomberg Businessweek, Nov. 23, 2012.
2Source: James Hunt, “The Sun Also Rises? A Contrarian Take on Japanese Equities.” Tocqueville, Nov. 14, 2012.
3Based on MSCI country index data and countries in the MSCI EAFE Index. Also see our research note.
4Source: Anna Mukai, “Japan Automakers Jump on Bets Abe Will Weaken Yen: Cars,” Bloomberg, Nov. 27, 2012.