Japanese stocks continued their advance after the recently
concluded Group of 20 (G-20) summit held in Moscow. Not only did
it hint towards scrapping the possibility of the notorious
currency wars, but it also somewhat ignored the ultra loose
Japanese monetary policy designed to boost the economy.
The Japanese economy has witnessed a number of changes in
terms of leadership as well as policy enactments over the past
few months. The newly elected Prime Minister, seems determined to
boost the Japanese economy by proactive measures such as an open
ended monetary easing program.
The economy has been a victim of deflation and almost zero
growth over a long time. But the recent Bank of Japan (BoJ)
measures, under the new leadership, aim to continue the monetary
easing until the inflation reaches 2%. This is somewhat similar
to the strategy adopted by the Federal Reserve, which had earlier
planned to continue with their quantitative easing till signs
emerged of unemployment below the 6.5% level and inflation not
over 2.5%. (Read
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Like any other monetary easing measures induced by a central
bank, the primary motive is to stimulate the economy. However,
the measures also aim at encouraging the investors to take on
greater risk. This is in order to boost the equity markets. And
it seems that the Bank of Japan has already succeeded in one of
these parameters i.e. bringing back the '
sentiment in the capital markets.
Since the beginning of November, the Japanese markets were in
anticipation of a major shift in leadership and policies. And
since that time the benchmark Japanese Index, the Nikkei 225 has
rallied around 41.23%.
While very little of this massive gain can be attributed to
the fundamental picture of the Japanese economy, one cannot help
but imagine that this surely was a central bank induced rally.
Whatever be the case, investors who could foresee this are
sitting over a fair amount of profit. (Read
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Furthermore, thanks to the monetary easing, the Japanese Yen
has lost about 15.31% versus the U.S dollars. While this may not
seem much of a problem to the investors holding yen denominated
assets in Japan, it surely does mean a lot to the U.S.
Considering the above, the
effective rate of return
for the U.S. investors would have been around 25.92%. This is
ascertained by subtracting the Yen depreciation from the rally in
the Nikkei 225 (i.e. 41.23%-15.31%). Therefore we see that yen
depreciation has reduced the profit substantially for the
In the light of this we would like to highlight two
which are easy as well as cost effective ways to gain exposure in
the Japanese equity markets. The
iShares MSCI Japan ETF (
WisdomTree Japan Hedged Equity ETF (
. Both these ETFs seek to provide exposure in the Japanese equity
market. However, there is a big difference between these two
Three Surging ETFs with Strong Momentum
DXJ seeks to hedge away any negative (or positive) currency
movement that the Japanese yen exhibits versus the U.S. dollar.
It does this by utilizing various currency swap agreements. As we
have discussed in this article as well as
, currency risk is one of the foremost factors that investors
must consider before taking any international investment
The Key to International ETF Investing
The above chart represents the comparative returns of EWJ with
DXJ on a one year look. Notice how the almost similar returns
pattern of the two ETFs diverges from end November onwards. The
currency hedged ETF DXJ starts significantly outperforming its
non hedged counterpart EWJ, although both these products have
witnessed a surge since the November levels.
This is the time when Japanese equity markets began to surge
and the Yen began to depreciate versus U.S. dollars. And the
disparity in returns clearly took place due to the weakening Yen
which caused EWJ to significantly reduce its profit potential.
But EWJ had earlier
made a bullish pattern
which hinted towards its surge. However, the surge would have
been greater, had the Yen not depreciated as much as it did.
In fact in the past few months EWJ has returned around 18.56%,
which is almost equal to the
that we had earlier talked about in the first half of the
article. However, for the same time period, DXJ has returned
around 36.70% in terms of total returns. This highlights the
impact that the Yen has had on the returns of the two ETFs in
What Lies Ahead?
While it is prudent to think that after such strong stock
market rally and currency devaluation, a reversal is imminent.
However, considering the BoJ's plans, the 2% inflation level is
still quite far. At the same time, a favorable G-20 meeting (for
the Japanese of course), more monetary easing and devaluation
seem to be the way to go. (See
Do Large Cap ETFs Signal Trouble Ahead?
However what will be interesting to see is whether the
Japanese market will just be swayed away by the flood of
liquidity (as it has thus far), or will macroeconomic
fundamentals start weighing in. Either way, DXJ still seems to
the 'safer' option for investors seeking a Japanese exposure
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WISDMTR-J HEF (DXJ): ETF Research Reports
ISHARS-JAPAN (EWJ): ETF Research Reports
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