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, surged 24.5% over the past month.
Meanwhile, broad currency-hedged Japan ETF plays like the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) rose 13.3%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) increased 10.9% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) gained 10.9% in the past month.
In contrast, the iShares MSCI Japan ETF (NYSEArca: EWJ) added 2.6%.
Japanese bank stocks started to strengthen in November after firms revealed better-than-expected second-quarter results, according to Bloomberg.
“Financial stocks are likely to be bought on the view higher bond yields will be reflected down the road,” Toshihiko Matsuno, a senior strategist at SMBC Friend Securities Co, told Bloomberg last month.
Yields on benchmark 10-year Japanese government bonds are now hovering around 0.05%, compared to trading in the negatives for most of year. Higher bond yields make it more profitable for banks to issue loans.
Financial stocks have also strengthened globally after Donald Trump won the U.S. presidential elections as traders anticipate the Trump administration would back softer regulations on the financial sector and may even scrap Dodd-Frank.
Furthermore, since Trump’s win, the U.S. dollar has strengthened on the improving U.S. economic outlook and rising interest rate expectations, with the USD breaking through 115 yen on Friday. The stronger dollar or weaker Japanese yen also improved the outlook on the Japanese economy, which has a large export industry.
Moreover, the weakening yen currency has allowed currency-hedged Japan ETFs outperform non-hedged Japanese equity funds.
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