By John Spence & Tom Lydon
ETFs that invest in Japan such as WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ) and iShares MSCI Japan (NYSEARCA:EWJ) were off more than 3% in early U.S. trading Monday and the yen rose after a manufacturing sentiment index was weaker than economists had forecast.
Japanese stocks retreated to start the second quarter as investors await a key rate decision by the Bank of Japan on Thursday.
Lackluster economic data bolsters the case for Bank of Japan Governor Haruhiko Kuroda to expand stimulus at his first policy meeting this week, Bloomberg News reports.
The quarterly Tankan for Japanese manufacturers revealed companies will reduce investment.
"Keeping expectations high will be extremely difficult for Kuroda," said Nobuyasu Atago, principal economist at the Japan Center for Economic Research, in the article. "The new central bank leadership will probably use the Tankan result as a reason to add monetary stimulus, as they'll argue that the BOJ shouldn't be throwing cold water on business confidence."
Japanese ETFs were lower Monday after a strong first quarter with DXJ gaining about 17% for the period. The WisdomTree fund was the top-selling ETF for the quarter.
DXJ outperforms Japanese ETFs that don't hedge their currency exposure when the yen weakens versus the dollar. However, CurrencyShares Japanese Yen Trust (NYSEARCA:FXY) gained 0.6% on Monday so DXJ fell harder than unhedged rivals such as EWJ.
The yen's sharp decline since last summer has fueled surging interest in DXJ. New Japanese Prime Minister Shinzo Abe is widely expected to drive the yen even lower in an effort to stoke inflation and assist the economy.
"Japan - the world's third largest economy - has been battling deflation, or falling prices, for over 15 years. Kuroda has pledged to do 'whatever it takes' to raise the country's inflation rate to 2.0% within two years," the Mail & Guardian reports. "Although many economists doubt that this goal is achievable within such a short period of time, they do expect the BOJ to act aggressively under his leadership. With the BOJ's overnight rate already at 0.1%, attention is focused on the central bank's asset purchase programs."
Yet investors were selling Japanese stocks Monday to take profits and on the belief that hopes for bold monetary easing are mostly priced into the market, said Makoto Kikuchi, the chief executive of Myojo Asset Management, in a Reuters story.
"That is not to say that sentiment is negative. People are still hopeful about easing, and we see some buying by long-term investors like pension funds that are raising their stance to 'neutral' from 'underweight' on Japan," Kikuchi added.