Last year, Japanese stocks and the corresponding ETFs listed in the U.S. rallied late in the year, but that was because of an obvious catalyst: The election of Prime Minister Shinzo Abe.
The rise in Japanese equities coupled with the faltering yen come as futures traders have pushed their net short yen bets to the highest levels in over six years, a sign that some market observers believe Abe and the Bank of Japan will be successful in engineering 2% inflation. [Hedge Funds see More Downside for Yen]
Last month, Daiwa said the Japanese economy, the world’s third-largest, is inching towards a virtuous cycle while Nomura forecast the Nikkei to hit 16,000 by the end of next March and 18,000 by the end of 2014. Goldman Sachs chimed in with an overweight rating on Japanese stocks. [A 2014 Sequel for Japan ETFs?]
In late November, Goldman said it expects Japan broader Topix to reach 1,450 next, about 15% upside from current levels.
Given the expected upside going forward for Japan ETFs, investors may also want to consider mixing in some small-cap exposure to complement a fund such as DXJ or DBJP. The WisdomTree Japan Hedged Small Cap Fund (NasdaqGS: DXJS), DXJ’s small-cap equivalent, jumped 4.3%. Although DXJS is a currency-hedged play, it is designed to be a play on a recovery in Japan’s domestic economy. The fund has accumulated nearly $32 million in assets since its late June debut. The SPDR Russell/Nomura Small Cap Japan ETF (NYSEArca: JSC) is up 11% in the past 90 days.
WisdomTree Japan Hedged Small Cap Fund
Tom Lydon’s clients own shares of DXJ.