Japan's main stock index rallied more than 2% on Wednesday, as the Nikkei 225 climbed above 15,000 for the first time since 2008.
After years of languishing in stagnation and deflation, Japanese markets are back to financial crisis levels. With the Bank of Japan sticking to its accommodative measures, investors can take a look at two Japan exchange traded funds that hedge against a depreciating yen currency.
Investors who hold Japanese equities are exposed to currency risks - a depreciating yen will diminish the performance once converted to U.S. dollars. However, Japan yen-hedged stock ETFs help investors capture the upside while mitigating the negative effects of the weaker yen, including the The WisdomTree Japan Hedged Equity Fund (DXJ) and db X-trackers MSCI Japan Hedged Equity Fund (DBJP).
Under the new government led by Prime Minister Shinzo Abe, the country is actively fighting against deflation and economic malaise through monetary policies. The central bank will double its holdings in government bonds and double the amount of money in circulation, writes Nellie S. Huang for Kiplinger.
Meanwhile, the Nikkei 225 is soaring as larger Japanese exporters project higher overseas profits on the weakened currency.
While the Japanese equities are now trading around 16 times expected earnings for 2013, slightly higher than the U.S. market's P/E of 14, profits are expected to rise 30% this year due to the weakened yen, according to Alec Young, global equity strategist at S&P Capital IQ.
Consequently, more people are increasing their allocations to the Japan's stocks. For instance, Morgan Stanley Wealth management has recommended a 5% allocation to Japanese stocks from 0%, and David Darst, the firm's chief investment strategies, expects another 30% to 40% rise this year in terms of the yen.
DXJ tracks the customized WisdomTree Japan Hedged Equity Index, and DBJP follows the MSCI Japan Index. So far, DBJP has been outperforming DXJ. DBJP has gained 41.3% year-to-date and 63.1% over the past year, while DXJ increased 36.9% year-to-date and 56.9% over the past year.
However, most investors have gravitated toward DXJ, which has gathered almost $6 billion in assets so far this year, compared to the $60 million that flowed into DBJP. Although, this may be partly because DXJ has a cheaper 0.48% expense ratio, whereas DBJP has a 0.50% expense ratio, and DXJ was the first to market.
Max Chen contributed to this article.