THE JAPANESE YEN MAY BE PEAKING -- THAT WOULD BE GOOD FOR JAPANESE STOCKS WHICH MAY BE BOTTOMING -- THE WISDOM TREE JAPAN HEDGED EQUITY ETF OFFERS A WAY TO BUY JAPANESE STOCKS WITHOUT CURRENCY RISK
CURRENCY DIRECTION REALLY MATTERS IN JAPAN... My Tuesday message explained why foreign currency direction is important when investing in foreign stocks. That message showed why a falling British pound hurts American investors investing in U.K. stocks. Currency direction is also important when investing in Japanese stocks. Chart 1 is meant to demonstrate that the Japanese yen (green line) usually trends in the opposite direction of its stock market. That's mainly because Japan is an export-oriented economy. The chart shows the Nikkei 225 (orange bars) surging from late 2012 to mid-2015 while the yen plunged. During that period, the Nikkei gained 140% while the yen lost -40%. American investors who bought Japanese stock in 2012, however, gained a much smaller amount (50%) than the Nikkei. That was because they lost money in the falling yen. Remember that when you buy foreign stocks you also buy the foreign currency. That can, however, sometimes work in your favor. Since the middle of 2015, a 22% jump in the yen resulted in a -25% loss in the Nikkei. An American investor lost barely -1% because of the rising yen. The trick is to find a rising foreign stock market with a rising currency. Or someway to hedge out currency risk. Fortunately, there's a way for American investors to do that in Japan.
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Chart 1
THE YEN MAY BE PEAKING ... Let's start with the yen. The best time to invest in Japan is when the yen is falling. Chart 2 shows the Japanese yen (green line) falling to a two-week low and undercutting a rising trendline starting in February. Its 14-day RSI and daily MACD lines (top of chart) have shown "negative divergences" since July. A stronger U.S. dollar (and heightened expectations for a Fed rate hike) are also working against the yen. That should boost Japanese stocks.
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Chart 2
NIKKEI MAY BE BOTTOMING... Chart 3 shows the Nikkei 225 trying to bottom. It has just risen above its 200-day line for the first time this year. A close above its September closing high (17081) would be another positive sign. That would be consistent with a falling yen. The problem is how to buy Japanese stocks without getting hurt by the falling currency.
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Chart 3
TIME TO HEDGE? ... The green line is Chart 4 shows Japan iShares (EWJ). That ETF is quoted in U.S. dollars. As a result, it does better when the yen is strong and dollar weak. Since February, the EWJ has gained 9%, largely thanks to a 17% gain in the yen (while the Nikkei lost -4%). Although the EWJ is still in an uptrend, its daily MACD lines (top of chart) is starting to weaken (as is the yen) . Chart 5 plots the Wisdom Tree Japan Hedged Equity Fund (DXJ). That fund hedges out the yen. As a result, it's a purer play on the direction of Japanese stocks. So here's the deal. If you're bullish on the yen, the EWJ is a better bet. If you're expecting a weaker yen, the DXJ should do better. That's assuming of course that Japanese stocks start to rise. The DXJ has just risen above its 200-day average for the first time this year, and appears to be bottoming. Its daily MACD lines (below the chart) are also positive. The DXJ, however, still has to clear a falling trendline extending back to the middle of 2015 to turn its trend higher.
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Chart 4
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Chart 5
DXJ MAY BE TURNING UP VERSUS THE EWJ... The black line in Charts 6 is a ratio of the Wisdom Tree Hedged Equity Fund (DXJ) divided by the dollar-denominated Japan iShares (EWJ). The ratio has broken a falling trendline from last December, and has risen to a three-month high. That suggests that the pendulum is swinging in favor of the DXJ. It's also important to note that the ratio trends in the opposite direction of the yen (green line) which may be peaking. Buying the DXJ is a hedge against a falling yen when Japanese stocks are rising. So if you think Japanese stocks are turning up, which would mean a lower yen, the Wisdom Tree Japan Hedged Equity Fund (DXJ) offers a way to buy rising stocks without being hurt by the falling currency.
