Japan released some rather unexpected news last week that caught most investors by surprise. As the fed is winding down QE3 in which monthly bond purchases have come to an end, Japan is hitting the gas on their own version of easing. The Bank of Japan (BOJ) increased its annual spending target from 60 to 70 trillion yen to 80 trillion yen or $720 in its stimulus program.
The Yen And Japan's Stimulus Package
With a stimulus package this large aimed at expanding Japan’s monetary base, there are little places the yen can go, but down. The currency did just that, plummeting to a six-year low last week. The BOJ has committed itself to reaching a 2 percent inflation rate as it fights off deflation. For this to occur it will take the yen to continue reaching for new lows.
Along with the BOJ, the country’s giant pension fund announced it would increase its allocation to of domestic stocks to 25 percent, helping push the Nikkei Index to a seven-year high.
International Reactions
The Japanese equity markets were not alone in rallying last week after the BOJ announcement. Stock markets around the globe cheered the move and the S&P 500 used the news as a catapult to a new all-time high. France's CAC 40 index was up 2.1 percent, Germany's DAX up 1.8 percent and the UK's FTSE 100 gained 1 percent as it digested the news.
iShares MSCI Japan ETF
TheiShares MSCI Japan ETF EWJ follows 310 publicly traded Japanese companies across 11 industries. The consumer discretionary stocks make up 21 percent, the industrials are at 20 percent and the financials come in at 19 percent.
The top individual holdings include Toyota Motor Corp (ADR) TM with a 6 percent holding, Mitsubishi UFJ Financial Group Inc (ADR) MTU at 2.7 percent and Softbank Corp. coming in at 2.6 percent.
The ETF is down 1 percent over the last 12 months and up 7 percent over the last six months. The ETF closed higher by 5 percent on Friday, October 31 after the news hit the wires. The ETF has an expense ratio of 0.48 percent.
WisdomTree Japan Hedged Equity Fund
The WisdomTree Japan Hedged Equity Fund DXJ consists of 317 Japanese holdings as well as 27 short and long currency contracts for the yen and U.S. dollar. The current economic situation in Japan could be the best-case scenario for the ETF, as it is long Japanese equities and short the yen. By increasing its monetary base, Japan is attempting to increase inflation by decreasing the value of the yen, thus benefiting DXJ from both angles.
The top holdings in the ETF are TM at 5.4 percent, MTU at 4.9 percent and Japan Tobacco Inc coming in at 3.8 percent.
DXJ is up 13 percent over the last 12 months, 16 percent over the last six and spiked 7 percent on Friday, October 31.
Investors should be aware that an ETF such as this is a doubled edged sword. As is capitalizes on both the rising equities and the falling yen in Japan, it will be negatively affected by falling equities and a rising yen, making it an above average risk investment.
Japan has struggled to fight deflation during its lost decades and the move last week by the BOJ may not be enough to win the battle. That being said, the short-term reaction by the equities and currency markets cannot be ignored, as the trend should continue into next year.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
