Look Now: A Once Beloved Japan ETF Rises Again

Through the first half of this year, Japanese stocks and the relevant exchange-traded funds disappointed investors, as the yen surged on safe-haven demand. A simple look at year-to-date data proves that point, but looks can be deceiving.

Yes, the Guggenheim CurrencyShares Japanese FXY is up 8 percent year-to-date, making it one of this year's best-performing currency ETFs. And yes, the WisdomTree Japan Hedged Equity Fund DXJ is down 4.4 percent this year, but that scenario is rapidly changing for the better.

Japan Headwinds

Over the past 90 days, FXY has plunged nearly 10 percent, while DXJ is higher by 13.2 percent. While many international markets and the corresponding ETFs have been seen as vulnerable to Donald Trump's ascent to the White House, at least for now, the same cannot be said of Japan. The dollar has been rallying since Trump's shocking victory. Since November 9, the day after Election Day, the U.S. Dollar Index is higher by 2.7 percent, FXY is off 4.4 percent and DXJ is higher by nearly 6 percent.

Many investors might criticize the lack of inflation, weak macro data and Japan’s corporate exposure to emerging markets as good reasons why Japan’s equity market should have played catch up. However, investors are ignoring a really significant divorce between Japanese earnings revisions and a number of macro indicators.

However, Japan, the world's third-largest economy, is home to some of the developed world's least expensive stocks. Some big-name institutions see more upside coming for Japanese equities as the post-election dollar rally continues and the yen falters.

Japan Tailwinds

Japan's “latest tailwind comes from America, where Trump’s shock election victory has fueled speculation that increased government spending will lead to higher U.S. interest rates and a stronger dollar. That’s good news for Japan because it translates into a weaker yen and an improved earnings outlook for exporters like Toyota Motor Corp (ADR) TM. The Japanese currency has dropped 6 percent versus the greenback over the past month, more than any other major Asian currency,” according to Bloomberg.

A Historical Look

Throughout most of its history, DXJ has been levered to the Japanese exporter story and that remains the case today as consumer discretionary and industrial stocks combine for over 47 percent of the ETF's weight. Three of DXJ's top 10 holdings are automakers, a group that historically benefits from a weak yen.

Investors are starting to nibble at Japanese stocks again.

“While international money managers sold a net $56 billion of the nation’s stocks through the end of September, they’ve since purchased almost $7.3 billion, according to data compiled by Bloomberg,” reports the news agency.