The Right Way to Invest in Japan

The U.S. stock market was not the only one hitting new highs yesterday, the Tokyo Nikkei hit the highest level since 2008. Japan’s major stock index has been riding the back of the global market rally, however there is one major factor the country has that has been setting itself apart.

The precipitous slide of the country’s currency, the Yen, has been a boost to the value of stocks based in Japan. As the currency declines in value it makes their goods more affordable to the countries Japan exports to.

When Shinzo Abe, Japan’s newest Prime Minister, said last year that he would use “unlimited easing” to get the country out of a long-term deflationary period, investors took notice and the Yen is down over 15% since that statement.

Over the last year the iShares MSCI Japan ETF ($EWJ) is up 7% and the Rydex CurrencyShares Yen ETF ($FXY) is down 14%. The reason EWJ is not up more is because the stocks are priced in Yen and as the US Dollar rises versus the Yen it equates to less gains for the stocks that make up the ETF.

So if we could somehow invest in Japan without having to take on the currency risk of the Yen falling more it would be a better scenario. The answer to this quagmire is the WisdomTree Japan Hedged Equity ETF ($DXJ). The ETF invests in large-cap Japanese stocks, but at the same time is short the Yen - basically the stocks are priced in US Dollars. Therefore a rise in Japanese stocks and a drop in the Yen is exactly what owners of DXJ are hoping for.

If the Japanese government sticks by its plan to continue monetary easing it will be a boost to Japanese exporters as the Yen hits new lows. This will lead to higher stock prices and DXJ continuing its current trend.

Below is a chart of all three ETFs over the last year. The 21% gain for DXJ is triple that of EWJ in just 12 months.