When Shinzo Abe became Prime Minister of Japan in December 2012 investors were excited, especially foreign investors. Seventy-percent of Japanese equities consist of foreign investment. So far this year, $46 billion has been pulled out of Japanese equities by investors, who include BlackRock Inc.
In September 2013, Prime Minister Shinzo Abe visited the New York Stocks Exchange with a message of “Japan is back.” Investors listened. Foreign money poured into Japanese stocks, driving them higher. The problem is that the Bank of Japan's (BOJ) negative interest rate policy has not been as effective as anticipated. If negative interest rates don’t work, then the BOJ has little room to move. However, Japan now has plans to double stimulus exceeding $184 billion. (For more, see: Japan's Economy Continues to Challenge Abenomics.)
Will it work? Nobody knows for sure in regards to the near future, but it has been proven that artificially inflating asset prices will not end well. For example, money has been moving out of Japan for 13 consecutive weeks.
Perception plays a big role in the investment world. This can be proven by the Federal Reserve’s recent decision to hike rates twice instead of four times in 2016. This change in stance has fueled a U.S. market rally despite no significant improvements for economic readings.
Investment Angles
This isn’t as easy as it seems. Shinzo Abe will not stop spending. If the economy appears as though it will slow, he will spend more. This, in turn, has the potential to draw foreign investors back in, which will again fuel equities higher. It’s a similar situation to the United States with the Federal Reserve, only that Japan’s situation is worse due to demographics and the second-oldest population in the world. As people age, they spend less. And unlike the United States, there is no large Millennial generation to act as a second wave down the road.
Taking all these factors together, traders might consider playing the bull side while investors might consider playing the short side.
The only way to short Japan directly is via a 2x inverse exchange-traded fund (ETF) that comes with a 0.95% expense ratio. The ProShares UltraShort MSCI Japan (EWV), tracks 2x the inverse performance of the MSCI Japan Index. It has appreciated 2.04% over the past year, but depreciated 83.32% since its inception on November 6, 2007.
If you want to go long on Japan via an ETF, look into the iShares MSCI Japan (EWJ) and WisdomTree Japan Hedged Equity ETF (DXJ).
EWJ tracks the performance of the MSCI Japan Index, which included small-cap, mid-cap and large-cap stocks, with the primary focus being consumer discretionary, financials and industrials. EWJ has net assets of $17.12 billion. It has depreciated 8.88% over the past year and 27.97% since its inception on March 12, 1996. It currently offers a dividend yield of 1.34%. The expense ratio is right at the ETF average of 0.48%.
DXJ tracks the performance of the WisdomTree Japan Hedged Equity Index, which tracks Japanese equities while also neutralizing exposure to the Japanese yen relative to the U.S. dollar. DXJ has net assets of $9.79 billion, has depreciated 22.15% over the past year as well as 17.13% since its inception on June 16, 2006. It currently yields 1.64% and has an expense ratio of 0.49%.
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