We are updating our Nikkei post from late May, ’13 on Japan, and showing the charts of the DXJ and the EWJ. We made our first buy of direct Japan ETF’s today, since 1995 this morning, as these two ETF’s are bottoming and remain very oversold.
Basically, a purchase of these ETF’s is a bet on Shinzo Abe’s and Japanese Central Bank Chair Kuroda’s ability to put the Japanese economy on a long-term path to growth, and to break the 25 year cycle of deflation that has gripped the Japan economy.
This won’t be an easy path: Japan has an aging population, and Japanese culture prevents or inhibits the type of “creative destruction” that occurs in the US economy over business cycles.
That being said, Japan latest GDP came in ahead of expectations at over 4%, and the Japanese PMI data has also been growing.
The EWJ is an unhedged ETF with a concentration in the automakers and Japanese industrials. Toyota, Mitsubishi, and Sumitomo are 6%, 3% and 2% of the ETF respectively.
The DXJ is a hedged ETF (which, since the yen is depreciating, helps the investor get the pure return of the Japanese Nikkei), with Mitsubishi, Toyota and Canon being 5%, 5% and 4% of the ETF respectively.
We think Abe and Kuroda are committed to turning Japan’s economy and stock market around. I would expect each ETF to take out the old highs over $12 and $52 if we are correct about the turnaround.
Use $10.50 for the EWJ and $42 for DXJ as stop-loss protection for the ETF’s. A trade below those levels on volume for the Japan ETF’s will mean we are wrong on the turnaround.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA