The Japanese yen’s safe-haven allure could rise if political volatility in Italy weighs on the euro and a U.S. government shutdown pressures the greenback. That safe-haven status for the yen makes Japan ETFs, like the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), vulnerable due to the often inverse correlation between the currency and Japanese equities.
DXJ and the iShares MSCI Japan ETF (NYSEArca: EWJ) are two of this year’s most prolific ETFs in terms of gathering assets. DXJ, the top asset-gathering ETF this year is up 31.5% this year thanks to the Bank of Japan’s ultra-easy and ultra-aggressive monetary policy that has included efforts to force the yen lower. [Hedge Funds’ Favorite ETFs]
“Thus far, the monetary stimulus has coincided with a weaker yen. A weaker yen ultimately helps large multinational companies that sell products overseas. Products of these companies generally become more attractive to foreign buyers when the yen weakens. Also, overseas sales converted back to a weak yen translate to more yen revenue, ultimately adding to the bottom line,” said WisdomTree Research Director Jeremy Schwartz in a research note earlier this month. [WisdomTree: Yen Weakness Flowing Through to Exporters Bottom Lines]
Looking at the year-to-date gains for DXJ and EWJ, the latter is up, 23.8%, it is apparent Abenomics, the term for Prime Minister Shinzo Abe’s economic policies, has been effective in restoring positive global sentiment to Japanese shares. However, global headwinds often send investors looking for safe-haven alternatives to the dollar, bolstering the yen and pressuring Japanese equities in the process.
Significant opportunity remains with DXJ and EWJ for patient investors if Japanese investors take the bait on a new investment scheme being introduced by the government in the coming days. Just as the U.K. looked to incentivize investors to embrace stocks by using tax breaks, Japan is set to engage in a similar effort.
“In a similar fashion to the UK’s individual savings accounts program (Isas) that inspired it, anyone over the age of 20 will be allowed to invest up to 1 million yen ($10,100) a year for five years, while paying no tax on capital gains or dividends,” reports Ben McLannahan for the Financial Times.
The Japanese answer to Isas, is the Nippon Individual Savings Account, or Nisas. The potential boon for Japan ETFs comes from the fact that in order for investors to qualify for the tax breaks, they must by equities, ETFs, REITs or investment trusts, according to the FT. Bonds will not entitle investors to the tax benefits.
Two decades of deflation have prompted Japanese investors to embrace bonds, despite paltry yields, and other cash instruments. The Nisa program hopes to reverse that trend, but it could take a while for DXJ and EWJ to feel any impact because it may be a hard to sell to get Japanese investors into their own country’s equities.
Citing data from Mizuho, the FT reported nine in 10 Japanese have never owned a mutual fund and 80% have not owned equities. Should that trend reverse, EWJ stands to benefit. Although the ETF does not feature the currency hedged component that DXJ has, EWJ’s largest sector allocation is 21.4% to financial services and that positions EWJ to thrive if the Nisa gambit takes off. [Why Retail Investors Love Japan ETFs]
iShares MSCI Japan ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of DXJ.