Japan ETFs Soar On Central Bank Action But Watch Out


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Japan's stock market rallied to its highest level in 4-1/2 years and the yen plunged after Japan's central bank unveiled a massive economic stimulus plan in hopes of ending nearly two decades of stagnation.

Japan ETFs soared above all others as huge demand caused shares to trade at a premium to their net asset value.

Investors joining the party Thursday could suffer a hangover once the ETFs resume trading at the real value of all their underlying stocks divided by the number of ETF shares outstanding.

WisdomTree Japan Hedged Equity ( DXJ ) flew 7.5% to 43.88 -- a nearly 6% premium over its NAV of 41.45.

CurrencyShares Japanese Yen Trust ( FXY ), measuring the yen against the dollar, fell 3.43% to 101.80 -- almost 4% below its NAV of 105.51.

IShares MSCI Japan Index ( EWJ ),WisdomTree Japan SmallCap Dividend ( DFJ ) andSPDR Russell/Nomura Small Cap Japan ( JSC ) all rose about 4%, but traded at smaller premiums than DXJ.

ETFs trade at a discount or premium to their NAVs when there are huge imbalances between supply and demand, such as when issuers halt share creations. This usually doesn't last long because authorized participants, who create and redeem ETF shares, can engage in arbitrage trading, which keeps ETFs trading close to their NAVs.

The yen had tumbled 17% from its mid-September peak while Japan's stock market rallied 48% in expectation that Japan's new government would take bold Federal Reserve-like actions to devalue the yen and stimulate the economy.

Bank of Japan Governor Haruhiko Kuroda delivered Thursday, announcing the BOJ would double the island nation's monetary base over the next two years and buy riskier assets like exchange traded funds and real estate trust funds.

"Japan's growth has been awful in the last few years and everything it can do to get growth going is a good thing," said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Mass. "Japan has been late to the game in terms of true quantitative easing, so it's playing catch up."

Japan's actions should be looked at in terms of a broader context compared with central banks in Europe and the U.S., he said. Over the past five years, Japan's central bank has increased its balance sheet by 35%, while Europe's doubled, the Federal Reserve's nearly tripled and England's grew 3.5 times.

How much stimulus the market has already priced in is too difficult to tell because it's been expecting it for awhile, Behravesh added.

"The huge surge in equity markets spurred by the yen's plunge has been a textbook devaluation scenario, in which stock markets wager that the beggar-thy-neighbor approach to sparking growth on revitalized export demand will work," Andrew Barber, CEO of Waverly Advisors based in Corning, N.Y., said in an email. "It probably won't."

Japan's ever-aging population will be impossible to support with a conversely shrinking workforce. Pensioners pulling savings and investments out of banks, will boost government lending costs, Barber contends. A shrinking tax base will be unable to pay off the national debt, which hovers above 200% of gross domestic product.

Foreign lenders will demand higher interest rates, further exacerbating the problem, he added.

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
Referenced Stocks: DFJ , DXJ , EWJ , FXY , JSC

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