Following some late May/early June struggles, Japan ETFs have rebounded in impressive fashion. For example, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), the top asset-gathering ETF this year, has surged 9.6% since June 24.
Another catalyst could be looming for DXJ and rival funds such as the iShares MSCI Japan ETF (NYSEArca: EWJ). Japan holds elections that will determine control of the upper house of parliament on July 21, providing an opportunity for Prime Minister Shinzo Abe to cement his status as one of Japan’s most popular leaders in recent memory and perhaps providing more upside for DXJ, EWJ and other Japan ETFs. [A Closer Look at Japan Hedged ETFs]
Abe’s Liberal Democratic Party was, obviously, able to win control of Japan’s premiership and lower house of parliament last December, but upper house elections were not held at that time. That means the world’s third-largest economy has been operating with a hung or twisted parliament, a scenario that has prevented the majority party from implementing all of its desired policies. U.S. investors and voters are familiar with that situation, but lack of complete control for Abe’s party has not stopped Japanese stocks from being Asia’s best performers this year. Nor has it prevented DXJ from soaring 26.1% year-to-date. [Japan ETFs Soar as Nikkei Hits 15,000]
It is widely expected that Abe’s LDP will cruise to victory in the upper house elections. “Newspaper surveys taken on July 4-5 and published on Saturday showed the LDP and its coalition partner, the New Komeito party, were on track to win more than 70 of the 121 seats up for grabs in the July 21 poll for the 242-seat chamber,” reports Linda Sieg for Reuters.
If the LDP controls both houses of parliament, Abe could have the political capital to push forward with an agenda that, to this point, has not been met with much opposition. That agenda includes weakening the yen, which has been accomplished, but Abe could push for levels such as 105 to 110 yen to one U.S. dollar, or more.
There has also been some push-back from Bank of Japan members regarding Abe’s goal of 2% inflation within two years. However, a sweeping LDP victory later this month could give Abe and his colleagues room to really go to work on Japan’s domestic economy by boosting personal incomes and consumption, the so-called third arrow of Abe’s economic policy. [Yen ETF Falls as G-20 OKs Easing]
While U.S. investors can remember plenty of times when stocks here in the U.S. rallied when one party controlled the House and the other ran the Senate, a look back at Japanese politics and its impact on ETFs is worthwhile. Abe, back for a second go-round, is Japan’s seventh prime minister since 2007. EWJ lost 29.5 from the start of 2007 through the end of last year.
WisdomTree Japan Hedged Equity Fund
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DXJ.