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Japan ETFs Stumble, Can They Regain Footing?

Zacks Equity Research

Japan ETFs have been in the limelight ever since Prime Minister Shinzo Abe came into power following recent elections in Japan. These investments have surged, as his leadership has sparked renewed interest in Japan investing, as well as hopes for an end to the long economic malaise in the nation (Japan ETFs: Six Ways to Play the Surge).

This uptrend was largely due to promises made by Shinzo Abe for a more aggressive monetary and fiscal policy. This program looked to revive the economic growth of the country while finally eliminating deflation.

Thanks to the initiative of unlimited monetary easing, Japanese equities and ETFs sprung to life. This shift in investors’ interest led to huge inflows of asset in Japan-based ETFs to start 2013, suggesting a massive change in overall perception over the nation’s fortunes.

This was largely reflected by two of the most popular Japan ETFs on the market today, the WisdomTree Japan Hedged Equity Fund (DXJ) and the iShares MSCI Japan (EWJ). Both of these funds have been on a tear as of late, adding significantly over the past few months (DXJ--Best ETF to Play the Japan Rally).

While this has been a strong, durable trend, some are worrying that recent economic events are suggesting an end to the yen weakness. The currency recently strengthened, while  geopolitical events in the region created somewhat of a risk-off atmosphere.

As a result, ETFs tracking Japan equities lost their recent momentum. Both WisdomTree Japan Hedged Equity Fund (DXJ) and lost nearly 5% and 4%, respectively, in the Monday trading session, possibly signaling a reversal now that we are in Q2 (Japan ETF (EWJ) Signaling Continued Bull Trend?).

However, it is believed that this strength in yen will be short-lived as Haruhiko Kuroda will lead his first policy meeting this week in which the central bank is poised to step-up monetary stimulus.

Haruhiko Kuroda said this week that the Bank of Japan will consider combining its monthly bond purchases and asset purchase fund, as well as buying more debt with longer maturities and scrapping a rule that limits the scale of bond buying. He has also suggested bringing forward open-ended asset purchases planned for 2014.

If the measures taken by the government to ease monetary policy work and result in further depreciation of the yen, this will turn in favor of an export oriented economy like Japan (As Yen Weakens, Currency Hedged ETFs Soar).

Either way, Japanese ETF investments are looking more interesting as we move forward in 2013. This is especially true if the current trend in the market place holds and more gains are seen in Japanese stocks.

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