Date
12 December 2017
Japanese equities typically move in opposite direction to the yen. Photo: Reuters
Japanese equities typically move in opposite direction to the yen. Photo: Reuters

Why Japanese equities are a good bet

With the Nikkei Index reaching a 21-year high, foreign investors’ interest in Japanese equities continues to pick up.

Investment in Japanese stocks is typically driven by two things: expectations of a weaker yen, which will stimulate exports and boost the export-driven economy, and the hope that the stocks’ currently low valuation will catch up with earnings growth.

I believe that a weaker yen will be the more important catalyst.

So how should foreign investors handle the foreign exchange risk?

One of the best ways is to invest in exchange-traded funds that have a built-in hedging mechanism. New York-listed WisdomTree Japan Hedged Equity Fund (DXJ) is one such ETF.

Since Sept. 8 the fund saw gains matching Nikkei’s 13 percent rise, indicating the hedging has worked.

Meanwhile, another factor could add upward potential to Japanese shares: the central bank’s ongoing purchase of ETFs tracking the Nikkei Index.

Bank of Japan holds about 16 trillion yen (US$140 billion) of ETFs, according to Citibank’s estimate. That number could go up to 31 trillion yen by March 2019, based on the current pace.

BOJ’s demand for ETFs will translate into demand for underlying shares.

The full article appeared in the Hong Kong Economic Journal on Oct. 27

Translation by Raymond Tsoi

[Chinese version 中文版]

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RT/CG

Columnist at the Hong Kong Economic Journal

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