On another down day for U.S. equities, a surprising group of
ETFs
are noticeably higher: Japan ETFs. With the world's third-largest
economy likely to hold elections next month, traders are
speculating that Shinzo Abe, head of the main opposition Liberal
Democratic Party, will become the country's next prime
minister.
Abe, himself a former prime minister, has talked the talked
when it comes to suppressing the yen. When it comes to
quantitative easing, Abe appears to have graduated from the Ben
Bernanke School of Easing because Abe has told the Bank of Japan
to engage in unlimited easing in an effort to reflate the
Japanese economy.
Whether or not BoJ does that and whether or not Abe wins are
other matters altogether. For today at least, traders like what
they hear hand have sent the ProShares UltraShort Yen (NYSE:
YCS
) up by more than 2.2 percent on volume that is already close to
being 50 percent above the daily average. Japanese exporters
prefer a weaker yen because it makes exports cheaper in
international markets while boosting income earned in foreign
markets.
Abe has also said BoJ should engage in a sub-zero interest
rate policy to spur growth in the Japanese economy. Earlier this
week, Japan said its third-quarter GDP contracted by 3.5 percent,
the worst drop since the earthquake and tsunami ravaged the
country in March 2011.
Still, Japan ETFs are showing some temerity today. The iShares
MSCI Japan Index Fund (NYSE:
EWJ
), the largest Japan-specific ETF by assets, is higher by 1.5
percent. Even the thinly traded SPDR Russell/Nomura Small Cap
Japan ETF (NYSE:
JSC
) is getting in on the act with a gain of almost 0.7 percent.
Prime Minister Yoshihiko Noda is expected to dissolve
parliament Friday with an eye toward holding elections in a
month. One reason why traders are bidding up Japanese equities
and punishing the yen today is that polls show Abe will handily
defeat Noda.
While Japan is usually viewed as politically stable nation,
the view of some outsiders is that BoJ has run out of policy
weapons with which to suppress the yen and reflate an economy
that has been savaged by deflation for the better part of two
decades.
Investors looking for Japan exposure while holding a hedge on
the dollar/yen trade should consider the WisdomTree Japan Hedged
Equity Fund (NYSE:
DXJ
).
Earlier this week, it was announced DXJ's index, the "the
WisdomTree Japan Hedged Equity Index will be adding a geographic
revenue filter to remove companies that derive the bulk of their
revenue from Japan. As a result, the WisdomTree Japan Hedged
Equity Index will allocate more weight and exposure to
Japan-based multinational companies that we believe stand to
benefit more from a weakening yen relative to the U.S. dollar,"
WisdomTree Research Director Jeremy Schwartz said in a research
note.
By focusing on Japanese firms that are less dependent on their
home nation for the bulk of their revenue,
the ETF becomes less vulnerable to yen
strength
. DXJ's new lineup could also sport a negative correlation to the
yen over all relevant time periods, providing investors with the
desired hedge effect.
For more on ETFs, click
here
.
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