Japan ETFs Rise To New Highs And May Have Room To Grow


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Japan ETFs 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 ( EWJ ) climbed 1.33% to 10.13, a 10-month high.WisdomTree Japan Hedged Equity Fund ( DXJ ), 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 September 2008.

By contrast,iShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, andiShares MSCI Emerging Markets Index ( EEM ) ended nearly flat.

Japan stocks rallied as the yen fell after Bank of Japan Governor Masaaki Shirakawa said he would leave office three weeks early.

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 inflation.

CurrencyShares Japanese Yen Trust ( FXY ), 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 the market.

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 high.

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 buying.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: DXJ , EEM , EFA , EWJ , FXY

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