Japan: Weekly ETF and CEF Performance

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Includes: DFJ, DNL, DXJ, EWJ, JOF
by: Steven Towns

So much for the nice run-up in Japanese stocks taking the TOPIX to 15+ year highs and the Nikkei 225 past 18,000 for the first time in 6+ years. The 10 Japanese ETFs/CEFs in the U.S. posted a 4.8% average loss last week.

At the time of publishing, the ¥/$ is now trading at ¥115.8/$1 and the N225 has fallen below 17,000 for the first time since Jan. 12.

See below for a one year chart of the N225 as of Friday (3/2).

N225-chart-03-02-07

The 10 Japanese ETFs/CEFs trading in the U.S. returned -4.8% on average last week, compared to their 0.86% and 3.58% average returns in the two weeks prior.

The three dividend-weighted ETF offerings by WisdomTree [SmallCap Dividend (NYSEARCA:DFJ), High-Yielding Equity (NYSEARCA:DNL) and Total Dividend (NYSEARCA:DXJ)] fared best last week, but still lost more than 3% each. iShares MSCI Japan Index (NYSEARCA:EWJ), the most actively traded country-based ETF, lost 3.9%. The weakest fund was the Japan Smaller Cap Fund (NYSE:JOF), a closed-end fund, which had traded at a double-digit premium to its NAV. See the chart below for returns of the other Japan funds.

As I said in my post covering weekly Japanese ADR activity:

My thoughts for this week are don't be in a hurry to buy, be selective and be patient.

The best way to understand the current situation for Japanese stocks is to recognize there is nothing fundamentally wrong; however, Japan is neither isolated, nor insulated from the global economy and capital flows. That means Japanese market participants are being led by action in New York, as always seems to happen when the market is weak. When Japanese stocks are strong, it typically means there is a lot of foreign money flowing in, even if the market in the U.S. is not so hot. We witnessed this in Japan's latest rally. The problem is when foreign money leaves, for whatever reason.

In its latest newsletter, Japon Investissements (Japan Investments) warns:

Foreign investors are currently the main players, look out for an inevitable correction responding to the bull.

The proof is in the capital flow, as Japan Investments notes the pace of foreign buying was the highest it has ever been at ¥4.2 trillion in the 12 weeks since a bottom was formed on Nov. 27. What's more is ¥1.8 trillion of Japanese stocks were bought in the first seven weeks of 2007, or ¥18 trillion annualized according their calculation. This is twice the ¥9.1 trillion (annualized) during the 1999 IT bubble and considerably higher than the record ¥10.3 trillion set in 2005. [Note: ¥1 trillion equals ~$8.5 billion]

Disclosure: The author owns iShares Japan call options.

Wkly-Japan-ETF-0223-0302

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