A strong dollar and continued central bank stimulus are supporting the rally in Japanese equities and country-specific exchange traded funds.
Year-to-date, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) rose 13.1% and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) increased 12.5%. [Large Investors Keep Supporting Japanese Stocks, ETFs]
The gains in Japanese equities have been sustained by the Bank of Japan’s aggressive quantitative easing policy, which was recently expanded in October 2014, reports Mia Tahara-Stubbs for CNBC.
Due to the loose monetary policies, the yen currency has plunged almost 50% against the U.S. dollar since the BOJ began easing. The CurrencyShares Japanese Yen Trust (NYSEArca: FXY), which tracks yen movements against the dollar, has decreased 16.9 over the past year and dipped 1.4% year-to-date.
Due to depreciation in the Japanese yen, Sunrise Brokers’ Head of Japan and Asian Equities Ben Collett argues that Japan still look attractive for foreign investors.
In dollar terms, “the Nikkei is up 9 percent so far this year, compared to 1.4 percent for the Hang Seng and 1 percent for Australia’s ASX,” Collett said in the CNBC article.
While some may be concerned that further depreciation in the yen could weigh on Japanese stock returns, Japan hedged equity funds, like DXJ and DBJP, could help diminish currency risks. Specifically, the hedged equity ETFs take on currency contracts or futures contracts to offset exposure to the Japanese yen. The two ETFs could outperform a non-hedged Japan ETF in a weak yen environment. For instance, the non-hedged iShares MSCI Japan ETF (NYSEArca: EWJ) is up 11.5% year-to-date.
While the BOJ has kept its monetary stimulus intact Tuesday, more are expecting further action ahead, with inflation falling, reports Li Anne Wong for CNBC.
“The only adjustment was that the Board now expects inflation to remain around zero for the time being abstracting from the impact of last year’s sales tax hike. Last month, it predicted it would slow further,” Marcel Thieliant of Capital Economics said.
The central bank is targeting a consumer inflation of 2% by early 2016. However, core consumer inflation was at 0.2% in January after a 1.5% peak in April due to lower energy prices.
Consequently, if the BOJ decides to ramp up quantitative easing, it would further bolster the economy and potentially drag on the yen currency.
WisdomTree Japan Hedged Equity Fund
For more information on Japan, visit our Japan category.
Max Chen contributed to this article.