Market Overview

A Compelling Catalyst For Japan ETFs

A Compelling Catalyst For Japan ETFs

The CurrencyShares Japanese Yen Trust (NYSE: FXY) is up almost 7 percent year to date, making it one of the best-performing major currency exchange-traded funds. Predictably, yen strength and dollar weakness have kept a lid on the performances of Japan ETFs, particularly currency hedged fare, such as the WisdomTree Japan Hedged Equity Fund (NYSE: DXJ).

Prime Minister Shinzo Abe's administration has recently dealt with some setbacks, prompting speculation the once popular Japanese leader lacks for political capital. However, there is evidence Abenomics is working and that proof could spark fresh upside in ETFs such as DXJ. Rising tourism is that catalyst.

“The boom in Japan’s inbound tourism is arguably the most tangible success story of Abenomics,” said WisdomTree in a note out Thursday. “Propelled by a steady stream of visa rule deregulation that started the first week that 'Team Abe' moved into the prime minister’s office in December 2012, inbound tourist arrivals have risen almost fourfold, from a 2012 monthly average of 697,000 to 2.6 million recently.”

Weak Yen Helps

Abe's impact on the yen is hard to miss. Currently, the Bank of Japan is one of several developed market central banks employing negative interest rates and over the past 36 months, FXY is off 6 percent, making it one of the worst-performing currency ETFs over that period.

Likewise, Japanese equities are benefiting from the weak yen. Over the past three years, the MSCI Japan Index, which is not currency hedged, is up just over 19 percent. DXJ is higher by a more impressive 23.8 percent over that period. Opinions are shifting regarding yen weakness.

“While in the past, the policy establishment viewed yen depreciation as fundamentally negative for Japan because the resulting import-price cost push depressed further local business and regional economies, currency depreciation is now becoming viewed as a positive policy tool for driving domestic growth in general and regional growth in particular,” said WisdomTree.

Right Place, Right Time

DXJ allocates over a quarter of its weight to consumer discretionary stocks, providing investors with leverage to Japanese exporters as well as improving consumption trends that can be tied to increasing tourism and related spending. About 35 percent of DXJ's combined weight is allocated to the industrial and technology sectors.

“Team Abe deserves credit not only for kick-starting the cycle but also for seeking to anchor demand-growth expectations for private hospitality entrepreneurs by setting aggressive long-term goals: Japan wants 40 million visitors by 2020 and then 60 million by 2030, a massive jump from last year’s 24 million,” according to WisdomTree.

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