Exchange traded funds such as iShares MSCI Japan ETF (NYSEArca: EWJ), WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) were dragged lower by the decline in Chinese stocks last month, but plenty of market observers have been out in recent days highlighting opportunities with Japanese equities.
The Nikkei was seen as a valuation play after the index gave up all its gains for the year on Tuesday, with analysts pointing out that Japanese companies’ record profits were not reflected in their relatively low stock prices compared to earnings.
Additionally, Japanese equities were rising on an optimistic Chinese economy, a major export market for Japan. China’s finance ministry said Tuesday that Beijing will implement a “more forceful” fiscal policy to stimulate growth, allocate funds to support infrastructure and cut taxes for small businesses. [Japan ETFs Get a Positive Jolt]
Bolstering the case currency for hedged Japan ETFs, such as the aforementioned DXJ and DBJP along with the iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ), Goldman Sachs said Tuesday it expects more downside ahead for the yen.
The Bank of Japan “is on course to boost monetary stimulus, weakening the yen to 130 versus the dollar within 12 months, Goldman Sachs analysts, including Robin Brooks, the chief currency strategist in New York, wrote in a report,” reports Netty Ismail for Bloomberg.
Looking at equity valuations, Japanese stocks look cheaper than the U.S. For instance, EWJ shows a 16.0 price-to-earnings ratio and a 1.4 price-to-book, whereas the S&P 500 index is trading at a 18.7 P/E and a 2.5 P/B.
For ETF investors, currency-hedged Japan ETF options may be a better play to hedge against the negative effects of a depreciating yen while capturing potential growth from loose monetary policies. [Post-Pullback Opportunity in Japan]
As the Bank of Japan adheres to a loose monetary policy and the Federal Reserve moves toward hiking interest rates, currency risks will be an issue with overseas investments. Nevertheless, investors may utilize yen currency-hedged options to take a more pure play on the underlying Japanese markets. Some technical analysts are also highlighting potential upside for Japan ETFs.
“Liberal Democratic Party lawmaker Kozo Yamamoto, who has advised Prime Minister Shinzo Abe on economic policy, said last week the BOJ should increase annual asset purchases by at least 10 trillion yen ($83 billion),” according to Bloomberg.
iShares Currency Hedged MSCI Japan ETF
