After a phenomenal year, Japanese equities started off 2014 weak, but exchange traded fund investors are still optimistic about the country’s economic outlook.
Despite the slow start this year, DXJ is among the top ten most popular ETFs of 2014, attracting about $329 million in inflows year-to-date.
In contrast, the Nikkei has dipped 4% so far in January, and Japan’s Ministry of Finance revealed that foreign investors pulled $2.1 billion out of Japanese stocks in the week ended January 11, reports Leslie Shaffer for CNBC.
“Obviously, we had an extremely good year last year,” Nicholas Smith, Japan strategist at CLSA, said in the article. “So there will be a certain amount of profit taking. But there’s no reason to start getting queasy on the bottom rung of the stepladder. This is the start of a recovery for Japan.”
Japan is just starting its recovery as the Bank of Japan and Prime Minister Abe’s administration undergo an unprecedented stimulus plan. [It’s in the Charts: It Could be a big 2014 for Japan ETFs]
“We’re still just starting a virtuous cycle,” Jesper Koll, head of Japanese equity research at JPMorgan Securities, said in the article. “Sure, the yen depreciation has helped, sure the huge surge in corporate profitability was the big thing over the last 12 months.”
Even with last year’s rally, Societe Generale points out that the Japanese market still looks cheap as stocks trade around 14.7 times 12-month forward earnings, compared to historical average of 16.3 times. The bank also projects the yen weaken to 118 against the U.S. dollar while the Nikkei continues to grow.
“The stock market ought to maintain its uptrend, and Japan could enter a virtuous circle that would enable Japanese corporates to stop deleveraging and lead Japan to escape the sluggish domestic demand and deflationary environment that has plagued it for so long,”according to Societe Generale.
The U.S. dollar is trading at 104.31 Yen. The CurrencyShares Japanese Yen Trust (NYSEArca: FXY) has declined 15.6% over the past year.
As the yen weakens and the Japanese economy expands, investors can take a look at yen currency-hedged Japan equity ETFs, like DXJ and db X-trackers MSCI Japan Hedged Equity Fund (NYSEArca: DBJP), which jumped 35.5% and 43.6%, respectively, over the past year. In comparison, the iShares MSCI Japan ETF (NYSEArca: EWJ), a non-currency hedged ETF, rose 24.2%.
WisdomTree Japan Hedged Equity Fund
For more information on Japan, visit our Japan category.