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Why Japan ETFs Are on an Incredible Run

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After the sweeping victory of prime minister Shinzo Abe in the Upper House election on Sunday, Japanese shares regained their lost ground and have already logged their “biggest gain in almost five months.” Hopes of a fresh bout of policy easing actually spawned the rally.

In fact, Abe has already planned a new economic stimulus package, which may be worth 10 trillion yen. He also instructed his economy minister to frame the package by the end of this month.

Behind Abenomics

The Japanese economy came out of a prolonged deflationary spiral after Abe took office in 2013. A monetary and fiscal firepower introduced by Shinzo Abe to lift the world’s third largest economy from feeble growth and deflationary pressure – commonly known as Abenomics – made Japanese stocks’ investor’ darlings in the last few years. 

However, the massive monetary easing was not enough to set the economy on a sustained growth path and deflationary threats also returned to the economy. To counter this, Japan beefed up of its asset buying program and even launched negative interest rates in January, which looked like a failed effort as the market and economy could hardly take advantage of the move (read: Japan ETFs to Buy on Negative Interest Rates).

Investors should note that Japan ETFs were beaten down in 1H16 thanks to a stronger yen on heightened safe-haven demand. In such a scenario, Abe’s landslide victory is being viewed as a chance to act freely on policy easing as both market and economy are asking for more stimulus.

Inside Abe’s New Proposal

Going by an article, the Abe government indicated that it will boost agriculture exports from rural areas and invest in the infrastructure sector. Government spending is especially needed as a strong yen and anemic demand affected corporate profits and in turn hurt capital spending plans.

He also stressed on better “access to child care and elderly care” as well as educational grants. Issuances of bonds for public-private partnerships and improving the tourism sector are also on Abe’s agenda.He also stressed on further labor market reforms.

Why is a Weaker Yen Necessary to Boost Japanese Stocks?

With sooner-than-expected stimulus talks doing the rounds, yen slumped this week on an expected surge in liquidity. Yen ETF CurrencyShares Japanese Yen Trust (FXY - Free Report) shed 4.3% in the last two days (as of July 12, 2016), responding to the Abe’s solid election win.

Also, a stronger-than-expected U.S. jobs report for the month of June that released last Friday firmed up the so-far-sagging greenback. If the wining trend of the U.S. dollar continues, yen will likely shed strength against it.

Since Japan investing is more of a yen story, any pullback in yen will give Japanese stocks ways to outperform. This is because Japan relies on exports considerably and a weaker currency always plays a vital role in helping Japanese companies operating abroad in repatriating more money earned in dollar terms.

Compelling Valuation a Tailwind?

Most of the Japanese ETFs are in shambles from the year-to-date look and thus offer reasonable valuation and more upside potential from here. Also, Brexit oozed every bit of risk-on trade sentiments in late June, giving investors reasons to return to the market now with full enthusiasm (read: 1H ETF Asset Report: Gold Glows; Equities Fade).

A Peek into the Outperforming Japanese ETFs

While all Japan ETFs were on a tear this week, the currency-hedged Japanese ETFs cluster is riding extremely high on a receding yen. Notably, the largest Japan ETF iShares MSCI Japan ETF (EWJ - Free Report) added over 3% in the last two days (as of July 12). But several currency-hedged ETFs offered double the return of EWJ (read: Time to Play the Bounce in Currency-Hedged Japanese ETFs?).

Below we highlight a few top-performing currency-hedged Japanese ETFs that have the potential to beat the market in the coming days.

WisdomTree Japan Hedged Financials ETF

The fund gives currency-hedged exposure to the financial companies of Japan. The fund yields about 2.34% annually (as of July 12, 2016). This much of yield is quite appealing from a Japanese ETF given that rock-bottom interest rates are prevailing in the economy. In fact, yields across the developed nations are at nadir, thus pushing investors hard to an investment like DXJF. The fund added about 11.6% in the last two trading days (as of July 12, 2016) (read: Top and Flop ETFs of 1H).

WisdomTree Japan Hedged Equity ETF(DXJ - Free Report)

The fund looks to track the WisdomTree Japan Hedged Equity Index which is designed to provide exposure to the Japanese equity market. The fund tacked on 8.5% gains in the last two days (as of July 12, 2016) and yields about 2.29% annually.

iShares Currency Hedged MSCI Japan (HEWJ - Free Report)

It is the currency-hedged version of EWJ. The fund advanced about 7.7% in the last two days (as of July 12, 2016).

Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP - Free Report)

The fund follows the MSCI Japan US Dollar Hedged Index and the product yields about 1.37% annually. DBJP was up over 7.7% in the last two days (as of July 12, 2016).

WisdomTree Japan Hedged SmallCap Equity ETF (DXJS - Free Report)

This ETF gives exposure to the currency-hedged small-cap stocks of Japan. The fund advanced about 7.5% in the last two days (as of July 12, 2016) and yields 2.19% annually.

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