ETF Trends
ETF Trends

Japanese stocks and country-specific exchange traded funds continue to advance as cheap valuations attract investors and the state and pension funds boost exposure to the domestic market.

The popular Japan hedged-equity ETF plays that capture Japanese market moves while diminishing the negative effects of a depreciating yen have outpaced U.S. markets. Year-to-date, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) is up 10.2% and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) is 9.9% higher.

Additionally, Japan’s market still shows relatively cheap valuations. Japanese companies have been growing earnings as the benefits of a weaker yen feed through the bottom lines of Japan’s largest companies, reports Josh Noble for the Financial Times.

Consequently, the Topix now trades at 16.7 times forward earnings, whereas the S&P 500 Index shows a 17.8 ratio. DXJ shows a 14.6 price-to-earnings and DBJP has a 14.8 P/E.

Supporting gains in the Japanese stock market, the GPIF, the country’s pension fund, has been accumulating more stocks as it cuts down its government bond exposure. Japan’s stocks have increased almost a third since October last year when the GPIF announced new asset allocation targets that would put trillions of yen into the domestic market. [Japan ETFs Could Strengthen As Institutional Money Pours Into Equities]

Moreover, the Bank of Japan and other small pension funds have also been increasing their share of Japanese equity exposure either through direct stock purchases or ETFs. [Small Pension Funds’ Buying Spree Supports Japan ETFs]

“There’s tremendous buying power coming from the Japanese pension funds and the Bank of Japan,” John Vail, chief global strategist at Nikko Asset Management, said in the FT article. “That’s the major reason [for the rally].”

Looking ahead, Masatoshi Kikuchi, chief Asia strategist at Mizuho Securities, argues that improved corporate governance could provide better value for Japanese shareholders.

“Activist funds are becoming more active in Japan,” Kikuchi said in the article. “There is growing expectation of more share buybacks and dividend increases.”

However, Neil Azous of Rareview Macro warns of a short-term slowdown, pointing out that the Mothers Index, or Market Of The High-growth and Emerging Stocks, has experienced its largest drawdown in two months. Since local investors are the ones who typically speculate on the Mothers, or small-cap stocks, and March historically shown a seasonal trend where domestic investors repatriate their money home, Azous argues that retail speculators could take profits on their large dollar-yen gains.

WisdomTree Japan Hedged Equity Fund

For more information on Japan, visit our Japan category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.