Back to top

Image: Bigstock

Nikkei at 30K After 30 Years: Time for Japan ETFs?

Read MoreHide Full Article

Japanese shares recently touched a more than a 30-year high on rising expectations of a revival in corporate earnings and economic growth. The Nikkei 225 Index recaptured the psychologically important 30,000 level for the first time since August 1990. Energy, healthcare, and industrial shares mainly drove the rally, per Economic Times. The event first took place in December 1988. However, the index crashed in 1990 "that followed the deflating of the asset-price bubble".

Investors should note that the Japanese economy advanced 3.0% sequentially in the three months through December 2020, following a 5.3% expansion in the previous period and beating market estimates of a 2.3% rise, as shown by the preliminary reading. Gross fixed capital formation mainly bounced back (rise of 3.2% versus 2.2% decline in Q3) and aided GDP growth.

On an annualized basis, the economy grew by an annualized 12.7% in Q4 compared with the previous three months, indicating the second-straight quarter of expansion and beating a median market forecast for 9.5% expansion. Exports to China picked up a lot.

Japan is expected to start coronavirus vaccinations this week, which is also acting as a tailwind for the markets. There are also high hopes that President Joe Biden's administration will be able to materialize the $1.9 trillion COVID-19 relief plan in the United States.

This along with global vaccine distribution will boost the global economic growth and demand for industrial activities. Since Japan has a lot of dependence on exports, such a pickup in global economy bodes well for the Japanese companies and markets.

Why Currency-Hedged ETFs to Buy?

Investors must be interested in buying Japan ETFs as these are enjoying high momentum. However, buying currency-hedged Japan ETFs would prove more profitable than the regular ones as the U.S. dollar has touched a four-month high against the yen as U.S. bond yields jumped.

According to Yukio Ishizuki, senior strategist at Daiwa Securities,“the dollar’s downtrend is over. At the start of the year, speculators were betting on a fall in the dollar below 100 yen. They seem to have abandoned such a view now,” as quoted on Reuters.

Over the past week, currency-hedged Japan ETFs returned better than the regular ones. While currency-hedged ones gained more than 2% past week, the highest return offered by the regular ETF SPDR Solactive Japan ETF was 1.4%.

ETFs in Focus

Franklin FTSE Japan Hedged ETF (FLJH - Free Report) – Up 2.9% Past Week

iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report) – Up 2.7% Past Week

Xtrackers MSCI Japan Currency-Hedged Equity Fund (DBJP - Free Report) – Up 2.6% Past Week

WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) – Up 2.4% Past Week

iShares Currency Hedged JPX-Nikkei 400 ETF (HJPX - Free Report) – Up 2.3% Past Week

Any Wall of Worry?

Japanese stocks have gained about 8% so far this month, and some analysts are seeing overvaluation concerns in it. "Earnings growth has already been priced in for at least a year from now. There is reluctance to chase the upside from here, but stocks won't fall too much,” per said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank, as quoted on Economic Times.

If the winning momentum cools down a bit, investors can try low P/E or undervalued ETFs like iShares MSCI Japan Value ETF (EWJV - Free Report) (up 9.2% YTD; P/E 11.97X) and WisdomTree Japan Hedged SmallCap Equity Fund (DXJS - Free Report) (up 7.2% YTD; P/E 13.78X).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>