Conditions Are Right for Currency-Hedged Japan ETFs

As many try to find ares of opportunities and diversify their portfolios, investors should take a moment to consider currency-hedged Japan exchange traded funds.

“We see global reflation and a weak yen propelling Japanese stocks higher on a currency-hedged basis,” Richard Turnill, Global Chief Investment Strategist at BlackRock, said in a research note.

Supporting the Japan outlook, the yen currency has been weakening. The U.S. dollar is now trading at around ¥116.19. The weaker yen boost earnings of Japanese exporters in local currency terms as their wares become more competitive in international markets.

“Forward earnings in Japan closely tracking the dollar/yen rate in recent years,” Turnill said.

“Japanese earnings estimates are rising. The three-month change in 12-month forward earnings estimates is near a two-year high. Japan’s relatively low corporate profit margins mean a given increase in revenues can have an outsized impact on earnings. A one percentage point increase in real global gross domestic product (GDP) growth has historically delivered a 21% boost to Japanese earnings, our analysis of the past 35 years shows, versus just 5% in the U.S.,” the strategist added.

A depreciating yen also makes Japanese assets cheaper or more attractive for foreign investors.

Moreover, the currency is likely to remain depressed against the greenback as zero-yield 10-year Japanese government bonds push local investors to buy higher-yield foreign bonds, like 10-year U.S. Treasuries, which further depreciates the yen as local buyers trade in their money for U.S. dollars.

Consequently, investors who are interested in gaining exposure to this segment of the global market have a number of ETF options to choose from, with currency-hedged strategies currently outperforming as the Japanese yen depreciates against the U.S. dollar.