Japan Downgrade Causes Few Ripples

August 24, 2011

Moody’s downgrades Japan, but investors hardly flinch.

Moody’s downgrade of Japan’s sovereign debt appears to be a nonevent in the world of ETFs, with the bellwether iShares MSCI Japan Index Fund (NYSEArca: EWJ) falling a bit, but hardly enough yet to consider it anything significant.

Moody's lowered the Japanese government’s rating to “Aa3” from “Aa2,” or three notches below a risk-free triple-A rating. Part of the limited reaction is because the Moody’s action brings its rating in line with competing ratings from Standard & Poor’s and Fitch. Also, Moody’s said in a press release that Japan’s outlook is stable, largely because so much of the country’s debt remains in the hands of Japanese investors.

EWJ, a fund with $7 billion in assets, fell 1.14 percent to $9.52 a share, according to data compiled by IndexUniverse. The competing WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) eased 0.8 percent lower to $32.21 per share. DXJ has a bit more than $530 million in assets. The relatively new Maxis Nikkei 225 ETF (NYSEArca: NKY), which is less weighted to financials, fell about 0.6 percent.

Some of the popular currency ETFs were down by similar amounts to the Nikkei ETF. The WisdomTree Dreyfus Japanese Yen ETF (NYSEArca: JYF) eased down 0.47 percent, while the Rydex CurrencyShares Japanese Yen ETF (NYSEArca: FXY) edged down 0.41 percent.

Some ETF industry insiders saw the news and any selling in connection to it as a buying opportunity more than anything else.

“Any decline in Japanese equities on this downgrade news is something we would see as a buying opportunity, as corporate fundamentals remain unchanged,” said Adam Patti, chief executive of IndexIQ, a Rye Brook, N.Y.-based fund sponsor. The company’s IQ Japan Mid Cap ETF (NYSE Arca: RSUN) closed unchanged today at $19.01 a share, according to information posted on Google Finance.

“Support for the stable outlook comes from the undiminished home bias of Japanese investors and their preference for government bonds, which allows the government's fiscal deficits to be funded at the lowest nominal rates globally,” Moody’s said in the press release.

“We believe that this funding cost advantage will be sustained by considerable institutional and structural strengths, which will prevail even with large budget deficits in 2011 and 2012,” Moody’s said.


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