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Japan ETF Rebound May Not Last

This article was originally published on ETFTrends.com.

Japanese ETFs have recovered their footing after a two-month sell-off, but some aren't so convinced that the good times will last.

The iShares MSCI Japan ETF (EWJ) , the largest Japan-related ETF on the market, has increased 2.4% over the past three months and is up 0.9% year-to-date.

However, some investors and analysts are still wary about the Japanese market's outlook.

“We’re not as bullish as we should be,” Amir Anvarzadeh, a senior strategist at Asymmetric Advisors, told Bloomberg. “We aren’t convinced that this is a recovery scenario.”

Anvarzadeh warned that the Bank of Japan will reduce its monetary stimulus earlier than expected, which could impeded the rally in the country’s markets. Furthermore, there are geopolitical concerns about Iran and North Korea, according to Mitsubishi UFJ Morgan Stanley Securities Co.

THe Nikkei 225 Stock Average has strengthened as the weak Japanese yen currency retreated from a 16-month high against the U.S. dollar on the two Korea's vow to make peace and U.S. President Donald Trump's plans to meet North Korean leader Kim Jong Un.

International investors have been a major supporter of the recent strength in Japanese markets, turning into net buyers in April after three months of net selling. Overseas investors acquired a net 207 billion yen, or $1.9 billion, in cash equities in April.

Biggest Risks for Japanese Equities

Looking ahead, Anvarzadeh argued that U.S. Federal Reserve rate hikes and inflationary pressures will be among the biggest risks for Japanese equities. Rising rates and higher input costs for companies due to higher commodity prices could cause the BOJ to cut back on massive stimulus measures.

Meanwhile, Norihiro Fujito, a senior strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, believed that geopolitical developments relating to Iran are a more immediate concern that could fuel global risk and increase safe-haven demand.

"There’s a possibility for things to get pretty tense," Fujito told Bloomberg. "This is something that warrants caution. Higher tension will push up the yen and stocks will be hit."

Traders who are pessimistic about Japan's outlook can look to inverse ETF products to hedge potential market risks. For instance, the ProShares UltraShort MSCI Japan (EWV) tries to reflect the daily -2x or -200% performance of the MSCI Japan Index, the same underlying index for EWJ. EWV declined 5.5% over the past three months and is down 4.7% year-to-date.

For more information on the Japanese markets, visit our Japan category.