The WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) and other Japan ETFs have been pressured by the yen’s recent resurgence as a safe-haven currency, but catalysts remain for stocks in Asia’s second-largest economy.
Following August’s global equity market rout, Japan’s Nikkei was seen as a valuation play after the index gave up all its gains for the year with analysts pointing out that Japanese companies’ record profits were not reflected in their relatively low stock prices compared to earnings.
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.
Technical analyst Rich Ross of Evercore ISI says Japanese stocks have become a buying opportunity, according to CNBC.