The unwinding of the yen carry trade prompted by monetary tightening by the BOJ undoubtedly spooked global investors. And that sparked sharp declines for Japan stocks and related exchange traded funds.
The late-July/early-August declines endured by Japan equities and ETFs such as the WisdomTree Japan Hedged Equity ETF (DXJ ) resulted in significant corrections that have some of these assets residing well below the highs established earlier this year. Market participants might be alarmed by the recent retrenchment experienced by Japanese stocks. But it’s also worth noting the asset class remains supported by some attractive fundamentals.
Combine those attributes with the fact that some Japanese stocks are now trading at more attractive multiples than they were prior to the July sell-off and the case for DXJ as a rebound play arguably builds. Of course, it’s important to know exactly what the fundamentals are supporting that case. Interestingly, it’s a mix of government and private sector efforts.
DXJ Holdings Could Bolster Shareholder Rewards
One of the widely highlighted fundamental catalysts for Japan stocks, including DXJ holdings, is that in recent years, companies in the country have made major strides regarding increasing dividends and share repurchase programs. Some of those efforts are at the behest of market regulators that are pushing an array of shareholder friendly reforms.
“We expect to see more companies publishing their profitability goals, more provisions for minority shareholders to demand transparency and more sanctioned avenues for shareholders to oust underperforming management teams,” noted Lisa Shallet of Morgan Stanley. “Finally, as global capital-markets activity picks up, an acceleration in deal-making could help unlock shareholder value.”
Potential Boost for Long-Term Case for DXJ
Speaking of the intersection of the government and the private sector — often viewed in a negative light in the U.S. — Japanese policymakers are implementing programs that could bolster ownership of the country’s stocks among local retail investors. Those efforts could bring millions of new participants into the market, potentially boosting the long-term case for DXJ.
“The government has embraced programs to stimulate domestic savings in equity-linked investments. This is driving new flows into Japanese stock markets, which for decades strained to attract new capital from consumers,” added Shallet. “The new Nippon Individual Savings Accounts (NISA), a tax-advantaged stock-investment program, are a case in point. New account openings have more than doubled in the six months through June 2024, with account sizes quadrupling over that period.”
She noted that Japan’s recovering economy is increasing wages and capital spending. That’s relevant to investors considering DXJ. That’s because the consumer discretionary and financial services sectors combine for almost 35% of the ETF’s roster.
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