Market Overview

How The Yen Is Affecting Japanese ETFs

Share:
How The Yen Is Affecting Japanese ETFs
Related DXJ
Kuroda Enters Second Term: Japan ETFs In Focus
Japan ETFs In Focus As GDP Grows For 8th Straight Quarter
Japan GDP - Not Bad, But No Room For Complacency (Seeking Alpha)
Related FXY
Alan Knuckman's Guggenheim CurrencyShares Japanese Trade
A Compelling Catalyst For Japan ETFs
Market Talk - Friday, Nov. 16 (TalkMarkets)

It's no secret that Japanese stocks and the yen often move in opposite directions. The inverse relationship was on display in the first quarter when the WisdomTree Japan Hedged Equity Fund (NYSE: DXJ) and the CurrencyShares Japanese Yen Trust (NYSE: FXY) moved in almost exactly opposite directions.

In the first three months of 2018, DXJ lost 5.8 percent while FXY jumped 5.4 percent. The other side of that coin is that when the yen falters, it's usually good news for Japanese equities and exchange traded funds such as DXJ.

What Happened

“When we look thus far at 2018, data from Japan’s Ministry of Finance has indicated that more than $30 billion has left Japanese equities from foreign investors,” WisdomTree said in a recent note. “Clearly, foreign investors haven’t been happy with Japan as an allocation, and a probable factor contributing to this activity is that people have seen the headline number for the Japanese yen/U.S. dollar exchange rate touching below 105 — quite a strong level!”

Year-to-date, DXJ is lower by 4.2 percent while FXY is higher by 3.1 percent. Investors have yanked $2.57 billion from DXJ this year.

Why It's Important

Those outflows from DXJ may prove to be hasty. The dollar is surging, up about 3 percent against a basket of major foreign currencies, including the yen, since the start of the current quarter. The inverse relationship between the yen and Japanese stocks is in full bloom in the second quarter, as FXY is lower by 3.1 percent since April 1 while DXJ is higher by almost 4 percent.

In 2018, the yen had been one of the strongest-performing currencies, despite the rise in the 10-year. In late April, the yen started coming under more pressure that coincides with the rise in U.S. versus Japanese yield differentials,” WisdomTree said.

Looked at differently, the Federal Reserve could raise rates as many as three more times this year, which could wind up benefiting DXJ.

What's Next

Some market observers are concerned the Bank of Japan is close to running out of tools with which to implement loose monetary policies. Yet it's unlikely the central bank there will seek tightening measures anytime soon.

As for DXJ, the ETF does not necessarily need an assist from Japan's central bank if the dollar rally continues with the Fed's own plans for higher rates.

Related Links:

Look at this New Commodities ETF

S&P 500 With Bonds

Posted-In: Long Ideas News Specialty ETFs Currency ETFs Forex Top Stories Markets Trading Ideas Best of Benzinga

 

Related Articles (DXJ + FXY)

View Comments and Join the Discussion!

Profiting From Data: How Investment Managers Can Monetize Data

Clash Of The Titans: What Buffett, Musk Are Squabbling About