BOJ Speculation Revives Currency-Hedged Japan ETF Trade

Japanese equities bounced Friday, with currency-hedged exchange traded funds leading the charge on a weakening yen, as speculators bet the Bank of Japan will give banks a helping hand.

Currency hedged ETFs, which diminished the negative effect of a weaker yen currency, outpaced non-hedged funds, on Friday. For instance, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ ) rose 2.8%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ ) increased 2.6% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP ) gained 2.6%.

In contrast, the iShares MSCI Japan ETF (NYSEArca: EWJ ) added 0.6% Friday.

Currency-hedged ETFs were outperforming as the CurrencyShares Japanese Yen Trust (NYSEArca: FXY ) dropped 2.0%, with the U.S. dollar appreciating 2.1% to JPY111.7.

The yen weakened and Japanese equities popped on speculation that the BOJ would enact further stimulative measures to prop up slowing economy. Specifically, the BOJ may consider helping the financial sector through negative rates on some loans, along with potential deep cuts to the BOJ's current reserve rate, which is already in negative territory, Bloomberg reports.

"This would mean banks can receive money for borrowing from the Bank of Japan," Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui Asset Management Co., told Bloomberg. "It's a plus for bank profitability as it eases the burden from the BOJ's negative interest rates."

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In an environment of falling interest rates and rising commodity prices, reflation-related sectors, like banks, insurance and real estate companies could benefit the most.

Currency hedged financial sector-related ETFs led gains Friday. The WisdomTree Japan Hedged Financials Fund (NYSEArca: DXJF ) , which tracks the Japanese financial sector and hedges against a depreciating yen currency,increased 5.0% and the Japan Hedged Real Estate Fund (NYSEArca: DXJR ) , which tracks a group of diversified real estate, real estate investment trusts and some construction companies, advanced 3.0%.

Looking ahead, Japanese market observers will be watching for next week's BOJ monetary policy meeting.

Currency-hedged ETFs may continue to outperform non-hedged options as the yen currency depreciates. Bullish bets on the JPY have reached a record, leaving speculators vulnerable to any additional stimulus the Bank of Japan announces in its April 27, 28 policy meeting, reports Netty Idayu Ismail for Bloomberg .

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

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