Japan ETF Rally Still Alive As Yen Weakens

Includes: DXJ, EWJ, FXY, YCS
by: Tom Lydon

Fueled by the Bank of Japan's aggressive monetary policy, Japanese equities and exchange traded funds have made a robust run, but heavy-weight hedge fund manager Dan Loeb believes there is more to support Japan's rally.

Speaking at the Skybridge Alternatives, or "SALT," conference in Las Vegas last week, Dan Loeb, founder and CEO of Third Point hedge fund, stated that he was bullish on Japan's outlook, reports Stephen Gandel for CNNMoney.

While the BOJ's new quantitative easing measures is certainly supporting the current Japanese stock rally, Loeb points to other long-term trends. For instance, he believes the new political leadership could create a more efficient economy and improve growth. Specifically, Japan's new Prime Minister Shinzo Abe has promised to enact reforms that would change wages and bring more women to the workforce.

"It's the structural reform that we see that will be the big game changer," Loeb said.

Moreover, Loeb points out that Japanese corporations will continue to profit on a weaker yen, which recently hit the $100 exchange rate.

"We're really focused on Japan," Loeb said, reports Gregory Zukerman for The Wall Street Journal. "If the yen goes from 100 to 110 it's a huge game-changer…there's a lot of room to go" in the rally for Japanese stocks.

Additionally, Japanese stocks are trading at a cheap 13 times earnings, compared to about 18 for U.S. stocks.

"There's a possibility of a big rally, and it's not a bet you have to pay up for," Loeb added.

Currency traders have taken short positions in the CurrencyShares Japanese Yen Trust (NYSEARCA:FXY) to capitalize on the Japanese yen's demise. More aggressive traders can also take a look at a leveraged ETF, the ProShares UltraShort Yen ETF (NYSEARCA:YCS). But investors should note that YCS can be extremely volatile.

The WisdomTree Japan Hedged Equity (NYSEARCA:DXJ) and iShares MSCI Japan (NYSEARCA:EWJ) are the two best-selling ETFs in 2013 as investors rode the rally in Japan. DXJ, though, has been outperforming EWJ as the WisdomTree ETF hedges against the depreciating yen.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.