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Are Currency-Hedged Japan ETFs Primed for Further Rally?
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Japan’s stock market has recently been hitting highs not seen since 1990, bringing memories of the shocking "lost decade" that followed to our minds. However, analysts argue that this is not a repetition of the past, but an evidence of Japan's structural reforms.
Behind the 1980s Crash
In the late 1980s, Japan's Nikkei 225 index hit a record high of 38,915, helped by low interest rates and a rapidly growing economy. The bubble burst when the Bank of Japan (BoJ) tightened its monetary policy in 1990, resulting in the collapse of equity and land prices.
Why We Are Less Likely to See the 1980s Again
Unlike the 1980s, today’s rising stock prices do not signal a bubble, according to economists. “It is very difficult to argue that Japan is facing the same situations as in the late 1980s,” says Dong Chen, head of macroeconomic research at Pictet, as quoted on CNBC. Current high inflation rates resulted from higher import costs and high commodity prices, not extensive speculation and credit misuse as we saw in the 1980s. Also, despite recent gains, the Nikkei is still about 18% below this all-time peak.
What Drove the Recent Rally?
This time around, several factors led to the Nikkei’s amazing performance. These include better-than-expected corporate results, share buybacks, a weaker yen, the effects of "Abenomics" (the economic policies of former Prime Minister Shinzo Abe) and signs of post-pandemic consumption revival.
A Hawkish Fed
A hawkish Fed since the start of 2022 has also boosted Japan investing. Due to Fed rate hikes, the greenback gained considerable strength, while Invesco CurrencyShares Japanese Yen Trust (FXY - Free Report) has lost 6.3% in the past year. Since the Nikkei is export-heavy, a weaker yen has become favorable for Nikkei investing. With the Fed likely to hike rates again in July, we expect Japan investing to win further in the near term.
Cheaper Valuation
Japan ETFs hold cheaper valuations. Even after rallying hard in the past one year, Japan ETFs are available at much cheaper valuation than that of U.S. stocks and ETFs. WisdomTree Japan Hedged SmallCap Equity Fund (DXJS - Free Report) is up 19.0% past year but still has a P/E of 9.97X. WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) has gained 29% this year and has a P/E of just 8.74X against the S&P 500’s P/E of 17.86X.
Global Interest in Japan
The return of foreign investors in Japan's stock market, unseen since the beginning of Abenomics in 2013, also hints at a positive momentum. As the reforms are still in their early stages, Japan's market remains an attractive prospect for global investors. Plus, Japan's leading tech and auto sectors make it a lucrative option for companies seeking to shift their supply chains away from China.
What Lies Ahead?
Nikkei reported in March that share buybacks by Japanese companies are likely to reach their highest level in 16 years, as quoted on CNBC. As the trend of corporate share buybacks is expected to continue, demand for Japanese equities should remain strong into the second half of the year.
However, with inflationary pressures mounting, experts predict a "marginally tighter" monetary policy over the next year. But for the second half of 2023, currency-hedged Japan ETF investing should be in fine fettle.
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Are Currency-Hedged Japan ETFs Primed for Further Rally?
Japan’s stock market has recently been hitting highs not seen since 1990, bringing memories of the shocking "lost decade" that followed to our minds. However, analysts argue that this is not a repetition of the past, but an evidence of Japan's structural reforms.
Behind the 1980s Crash
In the late 1980s, Japan's Nikkei 225 index hit a record high of 38,915, helped by low interest rates and a rapidly growing economy. The bubble burst when the Bank of Japan (BoJ) tightened its monetary policy in 1990, resulting in the collapse of equity and land prices.
Why We Are Less Likely to See the 1980s Again
Unlike the 1980s, today’s rising stock prices do not signal a bubble, according to economists. “It is very difficult to argue that Japan is facing the same situations as in the late 1980s,” says Dong Chen, head of macroeconomic research at Pictet, as quoted on CNBC. Current high inflation rates resulted from higher import costs and high commodity prices, not extensive speculation and credit misuse as we saw in the 1980s. Also, despite recent gains, the Nikkei is still about 18% below this all-time peak.
What Drove the Recent Rally?
This time around, several factors led to the Nikkei’s amazing performance. These include better-than-expected corporate results, share buybacks, a weaker yen, the effects of "Abenomics" (the economic policies of former Prime Minister Shinzo Abe) and signs of post-pandemic consumption revival.
A Hawkish Fed
A hawkish Fed since the start of 2022 has also boosted Japan investing. Due to Fed rate hikes, the greenback gained considerable strength, while Invesco CurrencyShares Japanese Yen Trust (FXY - Free Report) has lost 6.3% in the past year. Since the Nikkei is export-heavy, a weaker yen has become favorable for Nikkei investing. With the Fed likely to hike rates again in July, we expect Japan investing to win further in the near term.
Cheaper Valuation
Japan ETFs hold cheaper valuations. Even after rallying hard in the past one year, Japan ETFs are available at much cheaper valuation than that of U.S. stocks and ETFs. WisdomTree Japan Hedged SmallCap Equity Fund (DXJS - Free Report) is up 19.0% past year but still has a P/E of 9.97X. WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) has gained 29% this year and has a P/E of just 8.74X against the S&P 500’s P/E of 17.86X.
Global Interest in Japan
The return of foreign investors in Japan's stock market, unseen since the beginning of Abenomics in 2013, also hints at a positive momentum. As the reforms are still in their early stages, Japan's market remains an attractive prospect for global investors. Plus, Japan's leading tech and auto sectors make it a lucrative option for companies seeking to shift their supply chains away from China.
What Lies Ahead?
Nikkei reported in March that share buybacks by Japanese companies are likely to reach their highest level in 16 years, as quoted on CNBC. As the trend of corporate share buybacks is expected to continue, demand for Japanese equities should remain strong into the second half of the year.
However, with inflationary pressures mounting, experts predict a "marginally tighter" monetary policy over the next year. But for the second half of 2023, currency-hedged Japan ETF investing should be in fine fettle.