Japan country-specific exchange traded funds jumped Wednesday after the Japanese Nikkei 225 surged on its largest one-day move since the financial crisis.
The iShares MSCI Japan ETF (NYSEArca: EWJ) rose 0.8% Wednesday.
Meanwhile, the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) dipped 0.8%, with the Japanese yen currency trading at around 120.9 to the U.S. dollar.
Currency-hedged Japan ETF options were also strengthening off the weaker JPY. On Wednesday, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) rose 1.8%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) increased 1.8% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) gained 1.6%.
Japanese equities strengthened Wednesday after the Nikkei Stock Average jumping 1343.43 points, or 7.7%, to 18770.51, its biggest percentage gain since October 2008 and its biggest point rise since January 1994, reports Kosaku Narioka for the Wall Street Journal.
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.
“That created good timing to buy,” Naoki Fujiwara, fund manager at Shinkin Asset Management, told the WSJ. “It had been difficult to enter because the market kept falling.”
There is also rising speculation that the Bank of Japan will expand its quantitative easing program to support a flagging economy.
Furthermore, the sudden surge in the Nikkei suggested that short-covering may have fueled gains. Short sales previously rose to 41.6% of all selling orders in the cash trading market on Friday, the highest level in at least five years, and remained elevated through Tuesday.
“There have been so many shorts that were irrelevant to fundamentals,” Koji Uchida, chief fund manager at Mitsubishi UFJ Asset Management Co., told the WSJ.
A short position is a sale on a borrowed security. The investor needs to eventually return the borrowed stock by purchasing it back from the open market. If the price falls, the investor buys it back for less than he or she sold it for and pockets the profit.
A short squeeze occurs when investors with heavy short positions are forced to cover, or buy back, their shorts in the event of positive reports that result in a share appreciation. Consequently, the additional buying momentum from short sellers covering their options contracts helped bolster prices even further.
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Max Chen contributed to this article.