Why Investors Should Consider Yen-Hedged Japan ETFs?

japanese GDP growthJapan easily has one of the largest financial markets and the country also takes the 3rd spot in the list of the world’s largest economies. The country has faced significant trouble in past years though, as it has been unable to bring itself out of its multi-decade malaise.

However, rigorous reforms implemented by Japan’s new Prime Minister, Shinzo Abe, after coming to power have reinvigorated the nation’s markets. Moreover, Shinzo Abe’s party saw a recent victory in the elections which could allow him to continue his stimulus programs on a wide scale.

Abenomics for Yen

Abe’s plan for the Japanese economy, popularly known as Abenomics, is a radical effort to end years of deflation. His risky and aggressive policies are designed to boost exports and push the yen down. Abe had to adopt unpopular structural reforms to keep Japan growing.

The falling yen is boosting the nation’s exports as Japan relies more on overseas trade for growth. A weaker yen makes Japanese products more competitive on a global basis, shooting the profit margins up for their key businesses (read: As Yen Weakens, Currency Hedged ETFs Soar).

However, renewed fears over a global economic recovery might provide some strength to the yen, at least for the near term.

Lately, the yen was stronger than the dollar for the last two days after Fed Chairman Ben Bernanke declared that he was not in a rush to increase interest rates after the U.S. central bank bond-buying stimulus program slowed down.

These in turn cautioned investors in the stock markets of Japan and the effects were also seen in exports. However, with policies in place and the recent voting results, this trend is unlikely to continue for long.

Possible choice in this interesting space

For investors who wish to play in this space, the possible choices are enumerated below. We note that both the ETFs are hedged equity funds, and thus could be great picks to play Japan without worrying about currency issues:

Wisdomtree Japan Hedged Equity Fund (NYSEARCA:DXJ)

Launched in June 2006, DXJ tracks the WisdomTree Japan Hedged Equity Index and provides exposure to Japan’s equity markets but hedges the currency risk. The large blend fund has a huge asset base of $11.5 billion and charges 48bps in fees (see DXJ vs. DBJP: Which is the Better Hedged Japan ETF?).

With a total of 315 holdings in its basket, the top 10 stocks contribute 38% of the total assets.

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