As the Japanese economy strengthens, improving corporate earnings could lift risk appetite and help Japan country-specific exchange traded funds outperform.
Japanese stocks have been outpacing U.S. equities so far this year. For instance, year-to-date, the WisdomTree Japan Hedged Equity Fund (DXJ) rose 13.9%, iShares Currency Hedged MSCI Japan ETF (HEWJ) gained 13.8% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP) increased 13.7%.
The Japanese healthcare sector has been leading, with the WisdomTree Japan Hedged Health Care Fund (DXJH) surging 23.0% year-to-date.
Since the Japanese yen has been relatively flat against the U.S. dollar so far this year, the currency-hedged Japan ETFs have mostly mirrored the 13.7% rise in the non-hedged iShares MSCI Japan ETF (EWJ) .
According to a recent Reuters poll forecast, investors anticipate Japan’s Nikkei share average to end this year at 21,000 its highest level since lat 1996. The Nikkei 225 index was hovering around 19,207 Tuesday.
Lifting the optimistic expectations, company profits are projected to rise on a weak yen and stronger exports. Domestic consumption is also rising on cheap oil costs and higher wages.
“Investors will likely continue buying into Japanese stocks from both macro and micro factors,” Takuya Takahashi, a strategist at Daiwa Securities, said in the Reuters article.
Moreover, the markets have been supported by pension fund investments, such as the trillion-dollar Government Pension Investment Fund and Japan Post Insurance.
The Bank of Japan has also increased its quantitative easing commitment, raising its short-term Japanes government bond purchases to 375 billion yen, or $3.1 billion, of one-year to three-year JGBs at its first operation in April, up from 300 billion yen in March, Reuters reports. [Aggressive Easing Sustains Japan ETFs]
Nevertheless, there might be some growing pains along the way.
“From April to September, Greek debt issues, a U.S. interest rate hike and uncertainty over the European Central Bank’s policy could pressure the stock market, and the Nikkei may move a little lower than the current levels before it rises again,” Yoshinori Shigemi, a global market strategist at JPMorgan Asset Management, warned.
WisdomTree Japan Hedged Equity Fund
For more information on Japan, visit our Japan category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.