A pedestrian walks past an
electronic stock board displaying the Nikkei 225 Stock Average, top
left, outside a securities firm in Tokyo, Japan, on Friday, Oct. 31,
2014. Japanese stocks soared, with the Nikkei 225 Stock Average closing
at a seven-year high, as the Bank of Japan unexpectedly boosted easing
and the nation's pension fund prepared to unveil new asset allocations.
The
announcement that Japan had slipped back into recession may ultimately
be a case where bad news is good news for investors. At the end of
October, Japanese markets rallied on the tail of unexpected news that
the Bank of Japan (BOJ) would launch a new asset purchase plan, worth
¥80 trillion annually, an expansion of the unprecedentedly large
monetary-stimulus program announced only 19 months ago. Recession will
only reinforce the BOJ’s commitment.
“Now is a critical moment for Japan, and today’s steps show our unwavering determination to end deflation,” said BOJ Governor Haruhiko Kuroda of the central bank’s latest effort to
ease downward pressure on prices and help boost consumer price inflation to 2 percent next year. “We decided to expand the quantitative and qualitative easing to ensure the early achievement of our price target.”
Staying a Step Ahead of Conventional Wisdom
With the intention of doubling its monetary base, BOJ had announced an initial asset purchase plan of ¥60 trillion to ¥70 trillion, but it has now raised its annual target. Shortly after the more recent announcement, the Government Pension Investment Fund (GPIF) announced that it would more than double its target for Japanese stocks by selling some of its vast domestic bond portfolio.
Japan’s action comes at an interesting moment for investors. While quantitative easing (QE) by the US Fed is receding, it’s accelerating in other developed markets such as Japan, highlighting the divergent paths of U.S. and Japanese monetary policy. And that could be very good news for investors.
QE sends a strong signal
For the past five years, investors who followed the "don’t fight the Fed" mantra were richly rewarded. According to Bloomberg data, the S&P 500 Index rose 106 percent with relatively low volatility.
Investing Alongside Japan's Latest Stimulus
The same was true in Japan after the first stimulus announcement in February 2013, as Japanese stocks rose and the yen weakened. This year’s “October surprise” likewise had an immediate and positive effect on the Nikkei Index. Investors saw the action as another clear signal that Japan, in an effort to boost a moribund economy hit hard by slowing global growth and plunging oil prices, would undertake extraordinary monetary policies to end deflation and increase private consumption.
Kuroda emphasized the need to boost confidence levels in his announcement of BOJ’s preemptive monetary policy, stating, “There was a risk that despite having made steady progress, we could face a delay in eradicating the public’s deflation mindset.”
How to invest with the BOJ
While many U.S. investors remain underexposed to international equities, opportunities exist in developed markets overseas—and Japan is one of the few developed-market countries that still have attractive valuations. While stocks in developed markets are typically fully valued, and often overvalued, Japan remains one of the most affordable developed countries thanks to good earnings momentum. In addition, its attractive valuations offer an enticing entry point for investors.
The Answer to a Fluctuating Yen
There are various approaches to investing alongside the recently announced stimulus package. The traditional approach is to invest with dollars, as the iShares MSCI Japan ETF (EWJ) does. EWJ has the longest track record of any Japan ETF, and is potentially attractive to investors with both a positive view of the underlying foreign market equities and a weak view of the U.S. dollar. EWJ offers diversified exposure to large and midsize stocks, and is not currency-hedged.
Act local: Think about a currency hedge
Another approach is a currency hedge. As the monetary policies of Japan and the U.S. diverge, there has been downward pressure on the yen. For that reason, EWJ investors that could potentially benefit from the stimulus may still take a hit when they exchange yen for dollars. One way to gain exposure to Japanese stock performance while seeking to minimize exposure to fluctuations of the yen is with the iShares Currency Hedged MSCI Japan ETF (HEWJ). Should you chose one of these ETFs? The answer depends on your outlook for both the stocks and the currency, and your own investment objectives.
Finding Value in a Pricey Market
IMPORTANT INFORMATION:
Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses and, if available, summary prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Securities focusing on a single country may be subject to higher volatility. In seeking to track the performance of the Underlying Index, the HEWJ will attempt to hedge the currency exposure of non-U.S. dollar denominated securities held in their portfolios by investing in foreign currency forward contracts. While this approach is designed to minimize the impact of currency fluctuations on Fund returns, it does not necessarily eliminate the Funds' exposure to the component currencies. The return of the foreign currency forward contracts may not perfectly offset the actual fluctuations between the component currencies and the U.S. dollar. Exchange rates may be volatile and may change quickly and unpredictably in response to both global economic developments and economic conditions in a geographic region in which the Funds or the Underlying Funds invest.
Increased volatility will generally reduce the effectiveness of the HEWJ’s currency hedging strategy. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. There can be no assurance that the Fund’s hedging transactions will be effective. The use of derivatives may reduce the Fund's returns and/or increase volatility and subjects the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited.
The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI, and MSCI does not make any representation regarding the advisability of investing in the Funds. BlackRock licenses the use of MSCI indices and is not affiliated with MSCI. iSHARES and BLACKROCK are registered trademarks of BlackRock. iS-13954-1114
“Now is a critical moment for Japan, and today’s steps show our unwavering determination to end deflation,” said BOJ Governor Haruhiko Kuroda of the central bank’s latest effort to
ease downward pressure on prices and help boost consumer price inflation to 2 percent next year. “We decided to expand the quantitative and qualitative easing to ensure the early achievement of our price target.”
Staying a Step Ahead of Conventional Wisdom
With the intention of doubling its monetary base, BOJ had announced an initial asset purchase plan of ¥60 trillion to ¥70 trillion, but it has now raised its annual target. Shortly after the more recent announcement, the Government Pension Investment Fund (GPIF) announced that it would more than double its target for Japanese stocks by selling some of its vast domestic bond portfolio.
Japan’s action comes at an interesting moment for investors. While quantitative easing (QE) by the US Fed is receding, it’s accelerating in other developed markets such as Japan, highlighting the divergent paths of U.S. and Japanese monetary policy. And that could be very good news for investors.
QE sends a strong signal
For the past five years, investors who followed the "don’t fight the Fed" mantra were richly rewarded. According to Bloomberg data, the S&P 500 Index rose 106 percent with relatively low volatility.
Investing Alongside Japan's Latest Stimulus
The same was true in Japan after the first stimulus announcement in February 2013, as Japanese stocks rose and the yen weakened. This year’s “October surprise” likewise had an immediate and positive effect on the Nikkei Index. Investors saw the action as another clear signal that Japan, in an effort to boost a moribund economy hit hard by slowing global growth and plunging oil prices, would undertake extraordinary monetary policies to end deflation and increase private consumption.
Kuroda emphasized the need to boost confidence levels in his announcement of BOJ’s preemptive monetary policy, stating, “There was a risk that despite having made steady progress, we could face a delay in eradicating the public’s deflation mindset.”
How to invest with the BOJ
While many U.S. investors remain underexposed to international equities, opportunities exist in developed markets overseas—and Japan is one of the few developed-market countries that still have attractive valuations. While stocks in developed markets are typically fully valued, and often overvalued, Japan remains one of the most affordable developed countries thanks to good earnings momentum. In addition, its attractive valuations offer an enticing entry point for investors.
The Answer to a Fluctuating Yen
There are various approaches to investing alongside the recently announced stimulus package. The traditional approach is to invest with dollars, as the iShares MSCI Japan ETF (EWJ) does. EWJ has the longest track record of any Japan ETF, and is potentially attractive to investors with both a positive view of the underlying foreign market equities and a weak view of the U.S. dollar. EWJ offers diversified exposure to large and midsize stocks, and is not currency-hedged.
Act local: Think about a currency hedge
Another approach is a currency hedge. As the monetary policies of Japan and the U.S. diverge, there has been downward pressure on the yen. For that reason, EWJ investors that could potentially benefit from the stimulus may still take a hit when they exchange yen for dollars. One way to gain exposure to Japanese stock performance while seeking to minimize exposure to fluctuations of the yen is with the iShares Currency Hedged MSCI Japan ETF (HEWJ). Should you chose one of these ETFs? The answer depends on your outlook for both the stocks and the currency, and your own investment objectives.
Finding Value in a Pricey Market
IMPORTANT INFORMATION:
Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses and, if available, summary prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Securities focusing on a single country may be subject to higher volatility. In seeking to track the performance of the Underlying Index, the HEWJ will attempt to hedge the currency exposure of non-U.S. dollar denominated securities held in their portfolios by investing in foreign currency forward contracts. While this approach is designed to minimize the impact of currency fluctuations on Fund returns, it does not necessarily eliminate the Funds' exposure to the component currencies. The return of the foreign currency forward contracts may not perfectly offset the actual fluctuations between the component currencies and the U.S. dollar. Exchange rates may be volatile and may change quickly and unpredictably in response to both global economic developments and economic conditions in a geographic region in which the Funds or the Underlying Funds invest.
Increased volatility will generally reduce the effectiveness of the HEWJ’s currency hedging strategy. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. There can be no assurance that the Fund’s hedging transactions will be effective. The use of derivatives may reduce the Fund's returns and/or increase volatility and subjects the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited.
The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI, and MSCI does not make any representation regarding the advisability of investing in the Funds. BlackRock licenses the use of MSCI indices and is not affiliated with MSCI. iSHARES and BLACKROCK are registered trademarks of BlackRock. iS-13954-1114
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