Abe Allure Could Drive Japan ETFs Higher

Over the past several years, Japanese Prime Minister Shinzo Abe has received plenty of credit when Japanese equities rise and the yen falters. Likewise, when the yen rises, weighing on Japanese stocks, some market observers are quick to chide Abe.

This year, the yen has traded higher against the dollar and is one of the better-performing developed market currencies, but that isn't derailing Japan exchange-traded funds. For example, the WisdomTree Japan Hedged Equity Fund DXJ is higher by 4.2 percent year-to-date.

As is the case with some other major developed markets outside the U.S., Japanese equities are inexpensive relative to their U.S. counterparts. Japanese earnings growth coupled with ongoing yen weakness could serve as catalysts for the next leg higher for the country's equity markets and ETFs such as DXJ.

Headlines And Catalysts Could Be Coming

For the bulk of this year, DXJ has been able to grind higher in a sanguine environment without much in the way of surprises from the Abe administration or the Bank of Japan. Japanese economic data is improving, there are inklings of much-needed inflation and investors are desperate for value outside the U.S.

That doesn't mean DXJ and Japanese stocks lack for catalysts. In fact, some potentially impactful catalysts could be coming and coming soon for DXJ.

“After a period of relative calm and no new initiatives, Japanese politics is likely to move back into global headlines in the coming months,” said WisdomTree in a recent note. “This is because Prime Minister Shinzo Abe has now presented a concrete timeline for reforming Japan’s constitution: the goal is to clear all the necessary parliamentary hurdles by the summer of 2018 so that the required national referendum can be called before the end of that year. This ambitious agenda will not only push Japan back into global headlines but will reignite Japan’s pro-growth policies into 2018 and 2019.”

Double Down

Adding to the global political fray in 2018, Japan, the world's third-largest economy, could conduct a lower house election and a constitutional referendum. Those events could server to bolster Abe's efforts at economic improvement and could be positive for Japanese assets.

“All said, a double election—lower house and constitutional referendum—coming in the autumn of 2018 looks like a reasonable assumption. This should be good news for Japanese risk assets, if we are right and the coming pickup in Japan’s political metabolism results in a revival of pro-growth policies,” said WisdomTree.