Bloomberg News

Record WisdomTree Japan Outflow Shows ETFs Doubt Weak Yen

July 16, 2014

BOJ Governor Haruhiko Kuroda

Haruhiko Kuroda, governor of the Bank of Japan. The link between the nation’s foreign exchange and equity markets is dissipating as Kuroda holds back on adding to monetary stimulus. Photographer: Kiyoshi Ota/Bloomberg

Underneath the calm in the Japanese stock and currency markets, the two biggest U.S. exchange-traded funds tracking the nation’s equities are showing the widest divergence on record.

The WisdomTree Japan Hedged Equity Fund (DXJ:US), the largest U.S. ETF that allows investors to bet on Japanese shares while avoiding yen fluctuations, has lost $2.2 billion this year, data compiled by Bloomberg show. That includes withdrawals of $490.4 million on July 11, the biggest daily outflow (DXJ:US) since its creation in 2006. By contrast, BlackRock Inc.’s iShares MSCI Japan ETF, with no protection from currency swings, has attracted almost $1 billion, topping the WisdomTree fund by the most ever.

Investor interest in the hedged ETF is waning as the yen’s price swings plunged following the currency’s biggest yearly drop in three decades. The link between the nation’s foreign exchange and equity markets is dissipating as central bank Governor Haruhiko Kuroda holds back on adding to monetary stimulus. Across global stock markets, nowhere is calm descending faster than in Japan.

“Investors are increasingly buying unhedged ETFs to capitalize on a rally in Japan equities,” said Kyoya Okazawa, Tokyo-based head of global equities and commodity derivatives at BNP Paribas Securities (Japan) Ltd. “Expectations for further BOJ easing are clearly waning and currency volatility remains low. Most ETF buyers are not long-term investors and they’re betting the dollar-yen won’t move much in three to six months.”

Flow Reversal

The withdrawals from the WisdomTree ETF marked a reversal from last year, when the fund took in $9.8 billion as Japanese stocks posted the world’s steepest developed-market rally and the yen fell the most since 1979 against the greenback.

Japanese stocks have been aided by public institutions for more than a year. Unprecedented central-bank easing drove a 51 percent jump for the Topix index in 2013, and expectations for inflows from the nation’s biggest pension fund helped spur a 11 percent rebound from a May low. The equity measure, which closed little changed today, will climb 9.9 percent more by the end of December, according to the median estimate in a Bloomberg News survey of analysts and investors this month.

The Nikkei Stock Average Volatility Index, which tracks the cost of options on the Nikkei 225 Stock Average, tumbled 34 percent this year to 15.1 today, matching a seven-year low and the steepest decline among similar gauges tracked by Bloomberg worldwide.

The Bank of Japan yesterday kept its record stimulus unchanged and forecast inflation will pick up to its 2 percent price target. Economists have pushed back projections for further easing as Kuroda signals confidence in the bank’s progress in driving price increases.

Weakening Linkage

As investors weigh the BOJ’s outlook, the link between Japan’s currency and its shares is weakening. The 120-day correlation (TPX) between the yen and the Topix fell to 0.22 on July 9, the least since April 2012, data compiled by Bloomberg show. A reading of 1 would suggest equities rallied as the yen weakened in lockstep, while 0 signals no relationship.

“We initially expected additional BOJ action this month, but with inflation stronger than expected, we’re no longer holding out for any this year,” said Shinichiro Kadota, a foreign-exchange strategist at Barclays Plc in Tokyo. “The yen will trade sideways.”

The yen’s trading range against the greenback this year is the tightest since at least 1971, when Japan effectively ended currency control. The currency will end 2014 at 106 to the dollar, according to strategists surveyed by Bloomberg, less than 1 percent from where it traded at the start of the year.

Options Contracts

Traders owned more options on the iShares Japan fund, with more than 625,000 contracts outstanding, compared with about 475,000 for the WisdomTree ETF, data compiled by Bloomberg show. Implied volatility (EWJ:US) for the iShares fund, a measure of the cost for options, was 1.62 points lower than the WisdomTree ETF.

“The biggest reason why unhedged ETFs are so popular is that many people aren’t expecting the yen to drop further,” said Daisuke Karakama, a chief market economist at Mizuho Bank Ltd. in Tokyo, a unit of Japan’s third-biggest financial group by market value. “They’re thinking that the foreign exchange rate won’t cause losses for them any longer.”

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Yuko Takeo in Tokyo at ytakeo2@bloomberg.net

To contact the editors responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net Tom Redmond


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Companies Mentioned

  • DXJ
    (WisdomTree Japan Hedged Equity Fund)
    • $49.16 USD
    • 0.10
    • 0.2%
  • EWJ
    (iShares MSCI Japan ETF)
    • $11.26 USD
    • 0.04
    • 0.36%
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