Japan ETFs Skyrocket as Roller Coaster Continues

The rollercoaster ride for Japan exchange-traded funds continued on Wednesday as the WisdomTree Japan Hedged Equity Fund (DXJ) soared more than 5%.

Investors were soothed by comments from Bank of Japan Deputy Governor Shinichi Uchida in which he said that the central bank “will not raise its policy interest rate when financial and capital markets are unstable.”

The remarks helped stabilize a stock market that was roiled by the Bank of Japan’s surprise interest rate hike last week.

That hike, which took the BoJ’s policy rate to 0.25%— its highest level since 2008— led to a wave of deleveraging across financial markets around the world. 

Uchida’s comments suggest that the Bank of Japan is worried about the impact of its move on markets, and will hold back on lifting rates further until things calm down. 

That could help assuage some of the concerns about a further unwind of carry trades in which traders borrowed yen at low yields and purchased higher-yielding assets denominated in yen and other currencies. 

Huge Japan ETF Moves 

DXJ has had moves of at least 4.7% in four of the last five sessions. The ETF hedges its currency exposure, which means that it isn’t affected by fluctuations in the dollar-yen exchange rate.

When the yen was plunging for much of the year, the hedge worked in favor of the fund. DXJ was up nearly 35% year-to-date at its highest point in July, compared to a gain of only 13% for the unhedged iShares MSCI Japan ETF (EWJ).

However, over the past month, DXJ is down by 16%, more than double the 7% loss for EWJ.

By holding an unhedged basket of yen-denominated stocks, DXJ has benefitted from the recent rapid appreciation in the Japanese currency versus the dollar  

In other words, DXJ’s yen exposure has acted as a hedge against the carry trade unwind.