defied global stock market weakness Wednesday, surging to new
highs after the country's central bank governor unexpectedly
announced he would resign before his term ends.
IShares MSCI Japan Index (
) climbed 1.33% to 10.13, a 10-month high.WisdomTree Japan Hedged
Equity Fund (
), designed to neutralize currency risk, rose 1.48% to 41.13 -- a
two-year peak. The Nikkei rallied 3.8% to its highest level since
By contrast,iShares MSCI EAFE Index (
), tracking developed foreign markets, andiShares MSCI Emerging
Markets Index (
) ended nearly flat.
Japan stocks rallied as the yen fell after Bank of Japan
Governor Masaaki Shirakawa said he would leave office three weeks
Investors took this to mean his replacement, to be appointed
next week by new Prime Minister Shinzo Abe, will boost monetary
easing. Abe has asked the BOJ to undergo unlimited easing
policies to devalue the currency, invigorate exports and fan
CurrencyShares Japanese Yen Trust (
), measuring the yen against the greenback, is flirting with a
three-year low after diving nearly 19% in the past year.
"The Japanese equity markets have been in a bear market or
sideways market since 2006-07 so the optimism could lead to real
momentum, if change is successfully implemented by the new
government," said Daniel Weiskopf, a principal at Forefront
Capital in New York.
But a falling yen will eventually make its pitifully low
interest rates rise, which increases the odds of a market
"meltdown," says Charles Sizemore, founder of Sizemore Capital in
Dallas with $10 million in assets under management.
"Japan has escaped this in the past due to its large domestic
base of savers," Sizemore said in an email. "But Japan's savings
rate is now lower than that of the U.S. Japan's enormous
population of retirees is now living on their savings, not adding
to it. Japan will increasingly need to turn to the international
bond market to fund its gargantuan budget deficits."
Sizemore is watching for Japan's 10-year bond yields --
currently less than 0.80% -- to tick up to 1% to 1.5% to short
Japan's stocks will lag this year as the economic stimulus and
weakening currency will diminish the currency's safe-haven appeal
and dilute dollar-denominated investments, says Alec Young,
global equity strategist for S&P Capital IQ.
"While a weak yen tends to drive above-average equity gains as
export prospects brighten, negative currency translation dilutes
most of any dollar-denominated Japanese equity performance,"
Young wrote in a note.
"This year is a case in point: through Feb. 5, Japanese stocks
are up only 1.2% in dollar terms despite a 9.3% advance when
measured in yen," Young added. "This leaves Japan trailing the
broader MSCI EAFE Index's 4% gain."
Young recommends avoiding currency risk by buying WisdomTree
Japan Hedged Equity, which S&P rates "overweight." DXJ is 10%
above a 37.31 buy point after breaking out of a nine-month-long
saucer base. It has to rise 44% to regain its 2007 all-time
It has a robust IBD Relative Strength of 86, indicating its
price action has outpaced most of the market the past 12 months.
Its A- Accumulation/Distribution Rating shows heavy institutional