In the first quarter of 2015—a year ago—there were few ETF strategies more popular than the WisdomTree Japan Hedged Equity (DXJ | B-65), which attracted $2.6 billion in net inflows in that period. Investors had been flocking en masse to the currency-hedged portfolio of Japanese stocks since early 2014, really, buying into the notion that Japan’s Prime Minister Shinzo Abe’s plan for reform was going to end 25-plus years of deflationary pressure, and spark a new era of growth.
But in the first quarter of this year, there’s been a complete reversal of that trade. Bloomberg reported this week that since the beginning of the year, investors have already yanked more than $46 billion from Japan’s stock market, as it plummeted nearly 20%. And big investors too, such as BlackRock, it says.
DXJ has seen net redemptions of nearly $2.8 billion year-to-date, and the distaste for Japan exposure isn’t only linked to currency-hedged plays. DXJ’s nonhedged counterpart, the iShares MSCI Japan (EWJ | B-95), has now bled $1.65 billion in the same period.
Performance in these Japan ETFs is also faltering. Since the beginning of 2016, DXJ has now declined more than 11% to-date in a spectacular fall from mid-2015 highs. The unhedged EWJ is still holding onto 2% gains in the same period, but it too is struggling to find upside as investors give up on Japan, as the chart below shows:
Losing Faith In Abenomics
The main catalyst for the sudden bailout on this trade seems to be a simple loss of faith in Abe’s Abenomics—the three-arrow stimulus and reform program aimed at ending economic contraction in the country.
Abenomics has been implemented for more than two years now, and the Bank of Japan has shown itself to be committed to reaching its 2% inflation target—and staving off the recent strengthening of the yen—by expanding its stimulus program and introducing a negative interest rate policy earlier this year. It was a bold move. But it did little to encourage investors, who are growing worried that the plan has stalled and that it has failed to spur domestic consumption and economic growth as promised.
A look at the prevailing views on Abenomics today, from commentaries to blogs to news stories, paints a picture of investor disappointment, of missed opportunity by Japan’s leadership, of lack of imagination when it came to finding macro solutions to entrenched structural problems, and of pessimism for what lies ahead.
William Pesek, executive editor of Barron’s Asia, offered an interesting take—through the views of Paul Krugman and Joseph Stiglitz—into what went wrong, arguing that Abenomics sought to “treat the symptoms of what ails Japan (deflationary pressures) and not the underlying illness (a complete lack of confidence in the future).”