Hopes of further monetary easing helped Japanese equities and country-specific exchange traded funds rally Friday, with formerly bearish traders adding to the momentum on short covering.
The iShares MSCI Japan ETF (NYSEArca: EWJ) was 4.4% higher Friday after falling 10.9% year-to-date.
However, the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) dipped 1.0% on prospects of further central bank interventions, with the U.S. dollar gaining 0.9% to ¥118.7.
Meanwhile, currency hedged ETFs, which diminished the negative effect of a weaker yen currency, outpaced non-hedged Japanese stock funds. For instance, on Friday, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) rose 5.7%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) increased 5.9% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) gained 5.8%.
Japanese stocks rallied on hopes that policy makers would help fuel further growth after Prime Minister Shinzo Abe’s aide hinted that “conditions for additional easing have fallen into place,” reports Chao Deng for the Wall Street Journal.
Market observers have also been speculating that the Bank of Japan could augment its asset-purchasing program at its January 28 to 29 meeting.
“With further hopes for policy coordination among the central banks, the market will be supported,” Juichi Wako, a senior strategist at Nomura Holdings Inc., told Bloomberg. “Things will still be volatile, but we’ll generally be rising.”
The sudden rebound in equities and bullish sentiment helped pull Japanese markets out of a bear market, with bearish traders experiencing a short squeeze that helped bolster returns Friday.
“We’re seeing short squeeze galore,” Mikey Hsia, a trader at Sunrise Brokers LLP, told Bloomberg. “Much of this is technical. Japan has had big moves for three days in a row now – it’s becoming common.”
On Wednesday, the Topix index fell 3.7% to 1,338.97 at the close, trading at a 21% loss since a high on August 10, while the Nikkei 225 Stock Average also sank 3.7% to 16,416.19 and slid 21% off its June 24 peak. Bearish bets on Tokyo’s stock exchange accounted for over 40% of total trading value on Thursday. [Major Market ETFs in Bear Territory]
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.
WisdomTree Japan Hedged Equity Fund
Max Chen contributed to this article.