Japanese equity ETFs slide on BoJ policies and Brexit fears

Jun 17th, 2016 | By | Category: Equities

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Japanese equity exchange-traded funds have experienced significant declines recently as traders reacted to the Bank of Japan’s decision not to add further monetary stimulus and the upcoming Brexit vote weighed heavily on risk sentiment. The iShares MSCI Japan USD Hedged UCITS ETF (LSE: IJPD) and the SPDR MSCI Japan EUR Hedged UCITS ETF (LSE: JPEH), two of the largest funds to cover the space, are both down 9.3% between 31 May and 16 June 2016.

Japan equity indices slide on BoJ policies and Brexit fears

The Topix and Nikkei 225 indices fell 2.8% and 3.1% respectively on Thursday 16 June 2016 as risk-off sentiment took hold ahead of the upcoming vote on British membership within the EU.

The Nikkei 225 Index, the most widely quoted Japanese equity index, and the Topix Index, a leading reference for Japanese equities, representing over 1,800 companies listed within Japan, were down 10.4% and 10.0% over the same period, signalling an official correction in the market.

The sell-off in Japan’s equity markets has been attributed to the BoJ deciding to make no changes to its asset-purchasing program and deposit interest rate after a two day policy meeting which concluded on 15 June 2016. The Bank’s stimulus measures have in recent years been bullish for Japanese equities, although the indication that these policies may begin to be pared back has resulted in investors searching for value elsewhere.

The yen has also been making consistent gains against the dollar in 2016, having appreciated 5.8% since 31 May and 15.6% year-to-date. The ETFS 3x Long JPY Short USD (LJP3), a triple leveraged currency exchange-traded currency from ETF Securities, has returned 20.9% thus far this month. Although the strengthening yen has given some reprieve to US investors holding unhedged Japanese equity ETFs, the strengthening yen has been disruptive for local exporters, further adding to the downward pressure on the country’s equity indices.

Further compounding the issue is the uncertainty surrounding next week’s referendum on British membership within the EU. With polls indicating the Brexit result is hanging on a knife-edge, investors have been shying away from riskier assets. With under a week to go before the British public cast their vote, there may be further volatility in Japanese equity ETFs as investors’ risk-off sentiment becomes more prominent. That being said, one may potentially profit from such uncertainty through a position in an ETF covering inverse exposure to Japanese equities. Two such options include:

The Boost Topix 1x Short Daily ETP (LSE: 1JAS) provides the inverse of the daily return on the Topix Index. The fund trades in British pounds and has a total expense ratio (TER) is 0.75%.

In the US, the ProShares UltraShort MSCI Japan (NYSE Arca: EWV) provides twice the inverse of the daily performance of the MSCI Japan Index. It has a TER of 0.95%.

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