Grab Soaring Japanese Equities Exposure with Built-In Currency Protection

Japan’s economy isn’t content with simply limping into 2021. While the third largest economy managed to post a better third quarter in terms of GDP, the COVID-19 pandemic still warrants hedging equities in the local currency, which they can with the Xtrackers MSCI Japan Hedged Equity ETF (DBJP).

DBJP has a hedging component built into it–think of the ETF as an automotive equivalent of a collision assist warning system. Investors are protected should the Japanese yen fall relative to the U.S. dollar.

DBJP seeks investment results that correspond generally to the performance, of the MSCI Japan US Dollar Hedged Index. The fund, using a “passive” or indexing investment approach, seeks investment results that correspond generally to the performance, of the underlying index, which is designed to track the performance of the Japanese equity market while mitigating exposure to fluctuations between the value of the U.S. dollar and the Japanese yen. It will invest at least 80% of its total assets in component securities (including depositary receipts in respect of such securities) of the underlying index.

Looking at DBJP performance below, one can see that fund has made a nice V-shaped recovery since hitting a low at the height of the pandemic sell-offs:

DBJP Chart

Japan Well-Positioned for Continued Recovery

Japan is more than capable of weathering a storm. In addition to the pandemic, the country has had to endure a change of leadership, installing a new prime minister just a month ago.

“Japan’s economy likely rebounded in the third quarter as global demand picked up, a Reuters poll showed, but the effects of the coronavirus crisis persisted and it could take some time to return to pre-pandemic levels,” a Wall Street Journal report noted. “Gross domestic product (GDP) is forecast to have grown an annualised 18.9% in July-September, the poll of 18 economists showed, the fastest pace of growth on record since comparable data became available in 1980.”

“On a quarter-on-quarter basis, GDP is expected to have expanded 4.4% in the third quarter after it contracted 7.9% in the previous three months, the poll showed,” the report added. “A return to growth would pull the world’s third-largest economy out of its worst postwar recession, but analysts say a rapid recovery like that seen in China is unlikely.”

“The economy likely rebounded sharply in July-September thanks to a steady pickup in exports and consumer spending recovery after the government lifted emergency status,” said Shinichiro Kobayashi, senior economist at Mitsubishi UFJ Research and Consulting.

Even if the local currency falters, DBJP mitigates risk to the downside.

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