Following the U.S. presidential election, the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) has been one of the worst-performing currency exchange traded funds while equity-based Japan ETFs have been among the best developed markets performers.
The iShares MSCI Japan ETF (NYSEArca: EWJ) is the largest Japan ETF trading in the U.S., but EWJ is not a currency hedged fund.
Currency hedged Japan ETFs include the iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP). The currency-hedged ETFs are outperforming non-hedged funds as the local currency depreciates against the U.S. dollar.
While Japanese stocks have rallied, Japan’s banks and a currency-hedged financial sector exchange traded fund have been outperforming the broader market.
The WisdomTree Japan Hedged Financials Fund (NYSEArca: DXJF), which tracks the Japanese financial sector and hedges against a depreciating yen currency, is soaring.
“Shinzo Abe can turn the Donald Trump era to his advantage. At first blush, the quixotic behavior of the U.S. president-elect presents risks for Japan, which relies on globalisation and America’s role as regional policeman. Hence the Japanese prime minister got in to see the real-estate developer before any other world leader,” according to Reuters.
The Japanese economy grew at a faster-than-expected 2.2% pace in the third quarter, its third straight quarter of expansion. The growth was driven by exports, which increased 2% compared to the prior quarter. With the Japanese yen now depreciating against the U.S. dollar, export growth may continue to expand.
A depreciating yen is supporting Japanese markets as a weaker currency bolsters the country’s large export industry.
The currency-hedged ETFs outperform non-hedged funds when the local currency depreciates against the U.S. dollar, but these funds have been underperforming as the JPY surged against the USD this year.
“Unusually for Japan, Abe is now one of the longest-standing leaders of a major democracy. That gives him more global clout, and greater domestic appeal, as a fixture in a world upended by populism. In Washington, too, Tokyo will have an ally in Japanophile Commerce Secretary Wilbur Ross. And for all of Trump’s potshots at Japan during the campaign, Abe’s right-wing Liberal Democratic Party has always been closer to Republicans than Democrats,” notes Reuters.
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