Japan ETF Rebound May Not Last

International investors have been a major supporter of the recent strength in Japanese markets, turning into net buyers in April after three months of net selling. Overseas investors acquired a net 207 billion yen, or $1.9 billion, in cash equities in April.

Biggest Risks for Japanese Equities

Looking ahead, Anvarzadeh argued that U.S. Federal Reserve rate hikes and inflationary pressures will be among the biggest risks for Japanese equities. Rising rates and higher input costs for companies due to higher commodity prices could cause the BOJ to cut back on massive stimulus measures.

Meanwhile, Norihiro Fujito, a senior strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, believed that geopolitical developments relating to Iran are a more immediate concern that could fuel global risk and increase safe-haven demand.

“There’s a possibility for things to get pretty tense,” Fujito told Bloomberg. “This is something that warrants caution. Higher tension will push up the yen and stocks will be hit.”

Traders who are pessimistic about Japan’s outlook can look to inverse ETF products to hedge potential market risks. For instance, the ProShares UltraShort MSCI Japan (NYSEArca: EWV) tries to reflect the daily -2x or -200% performance of the MSCI Japan Index, the same underlying index for EWJ. EWV declined 5.5% over the past three months and is down 4.7% year-to-date.

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