Japan ETFs: From Leaders To Laggards

April 12, 2016

Tax Increase First Misstep

The government’s first—and perhaps most notable—misstep was increasing taxes on a population that hadn’t seen any significant wage growth in nearly 25 years. It’s worth a read.

Since Abenomics started, the yen slipped more than 30% against the dollar—the perfect backdrop for a strategy like DXJ or the Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP | B-72). But year-to-date, the Japanese currency is up more than 10% relative to the dollar, as volatility and risk sentiment pick up. Look at this CurrencyShares Japanese Yen Trust (FXY | B-99) chart:

Charts courtesy of StockCharts.com

Japan Macro Advisors was already forecasting the end of Abenomics back in February. According to the Tokyo-based firm led by Takuji Okubo, managing director and chief economist, “The idea behind Abenomics was sound, but it was badly executed.”

“In theory, the policy package aimed to implement painful structural reforms while expansionary fiscal and monetary policies played the role of painkillers. In reality, no significant structural reforms were executed,” the firm said in a report. “In the meantime, painkiller policies were used in abundance, especially the monetary easing.”

According to them, the monetary easing that led to a weaker yen initially helped the bottom line of Japanese companies, particularly exporters. But it didn’t change their outlook on the economy.

“However, it seems that Japanese corporate managers did not mistake the short term benefits from the weak yen as an improvement in the long term competitiveness of exporting from Japan,” the report said. “Export volume from Japan hardly grew, as companies refrained from shifting production capacity back to Japan.”

Their conclusion, if right, could mean the outflows from Japanese equities is not over. As they put it, “Is Abenomics salvageable? We do not think so, but public policy makers will try.”

Bullish Pockets In Japan

Still, there are some Japan bulls. WisdomTree’s Jeremy Schwartz says that “Japan could represent one of the best equity markets over the coming years.”

In a recent blog, he suggested investors who agree with that view should consider Japanese quality dividend stock ETFs, or those owning Japanese companies that have solid growth prospects and that are currently at attractive valuations.

Schwartz, of course, has skin in the game as the director of research for WisdomTree—the issuer behind DXJ and a lineup of other Japan-focused strategies. But every market has two sides, and for what it’s worth, WisdomTree was ahead of the game when it rolled out DXJ, and it has shown that it knows a thing or two about Japan.

Contact Cinthia Murphy at [email protected].

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