Late last month, the Bank of Japan wowed global investors by unexpectedly increasing monetary stimulus. Japan’s Government Pension Investment Fund added to the ebullience by doubling its exposure to equities while slashing its allocation to low-yielding Japanese government bonds.
That news sent Japan ETFs, such as the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) and the iShares MSCI Japan ETF (NYSEArca: EWJ) soaring, but some of the shine has come off the long Japan ETF trade after the it was reported earlier this week that the world’s third-largest economy has slipped into a recession for the second time in two years.
Ahead of December’s parliamentary elections, weakness in Japan’s economy is giving some analysts pause about ETFs tracking Japanese stocks.
“Continued deterioration of the investment profile of Japan’s capital markets seems inevitable irrespective of the outcome of the national ballot next month and subsequent modifications of macroeconomic policies. Already one of the world’s poorest performing equity markets in US dollar terms, the land of the rising sun also boasts equally worse sovereign debt market returns and a currency in precipitous decline – none of which conveys an auspicious impression of Japan as a reputable destination for foreign investment over any time horizon for the foreseeable future,” said S&P Capital IQ in a new research note.
The research firm notes that with many ordinary Japanese citizens dissatisfied with the lethargic state of their economy, financial markets could view next month’s ballot as a referendum on Abenomics.
“If ever a ballot appeared destined to render a verdict on a governing party’s economic record, Japan’s snap December parliamentary poll – in determining the political fate of Premier Shinzo Abe and his cabinet – is expected to disappoint the markets in that it is highly unlikely to engender a shift in the balance of power from the ruling Liberal-Democratic Party-Komeito coalition to its main rival, the Democratic Party of Japan (DJP), the next most popular electoral option,” said S&P Capital IQ.
It was Abe’s election in late 2012 and subsequent heavy-hand efforts to weaken the yen that made DXJ and DBJP two last year’s top-performing developed market ETFs, shining a light on the advantages of currency hedged ETFs in the process. [Value With Japan ETFs]