With the Japanese yen weakening and speculation Prime Minister Shinzo will augment his administration’s stimulus measures, investors interested in the Japanese equities market should consider a currency-hedged exchange traded fund strategy.
The Japanese yen experienced one of its worst weeks since 1999 as the U.S. dollar appreciated to about ¥105.6 from ¥100.5 over the past week.
The long-yen play has diminished in recent sessions as traders anticipate Japanese policy makers could enact greater stimulus measures to goad a slowing economy, especially as market confidence fades in the wake of a potential post-Brexit slowdown.
The yen also depreciated after Prime Minister Shinzo Abe’s ruling coalition acquired a majority in the parliament’s upper house. Japanese equities rallied and the yen weakened on hopes that the more hands-on administration would enact further measures to support the economy.
In a statement, Abe said he would use this victory to push forward with his economic reform program, or so-called Abenomics. Abe has even met with former Federal Reserve chief Ben Bernanke, a champion of loose monetary policies.
Looking ahead, we will have to wait until the July 28 and 29 policy meeting to see what further direction the Bank of Japan will provide.
Investors, though, can position ahead of any further additional stimulus measures through currency-hedged Japan country-specific ETFs. As the name suggests, a currency-hedged ETF strategy helps diminish the negative effects of a depreciating local currency against the U.S. dollar – if a foreign currency weakens against the USD, international investors would generate a lower USD-denominated return. The currency-hedged ETFs would essentially outperform non-hedged funds when the foreign currencies depreciate against the U.S. dollar, but the opposite would also be true if the foreign currency appreciates.