Savage Selloff Hits Japan Stock ETFs as Americans Shun Abenomics

Are American Investors Losing Faith in Abenomics?
  • Two largest U.S.-listed Japan funds shed almost $10 billion
  • Roughly equal withdrawals from the hedged and unhedged ETFs

American investors in Japanese stocks just want out, even if they’re getting currency gains from a soaring yen.

Outflows this year from the two biggest U.S.-listed exchange-traded funds tracking the Tokyo market swelled to almost $10 billion as the Topix index tumbles to one of the world’s largest losses. The BlackRock Inc. and WisdomTree Investments Inc. funds are both in the top five of more than 1,300 American ETFs in terms of money pulled, data compiled by Bloomberg show.

Perhaps more surprisingly, both have seen roughly the same amount of withdrawals, even though BlackRock’s iShares MSCI Japan ETF, which has no protection against currency moves, gives investors the benefit of the yen’s 20 percent advance against the dollar this year. That means its decline is much smaller than that of WisdomTree’s Japan Hedged Equity Fund. For Northern Trust Corp., a loss of confidence in the Asian nation’s policy chiefs explains why the exodus is indiscriminate.

QuickTake Abenomics

“The Japanese stock market has been the worst-performing major stock market in the world, and that’s the No. 1 driver of these outflows,” said Jim McDonald, chief investment strategist at the Chicago-based money manager, which oversees $845 billion. “It’s been a change in sentiment over Japan in the last six months since they went to negative interest rates in January. That was a wake-up call to investors that Japanese policy makers were starting to run low on ideas.”

The benchmark Topix index has plunged 22 percent in 2016 through Friday when measured in yen, buffeted by everything from concerns about a slowdown in China and falling oil prices to the Bank of Japan’s January decision to push borrowing costs below zero and the U.K.’s shock vote to leave the European Union. The equity gauge, which tends to post larger declines than other markets when the yen strengthens in times of global turmoil, is the second-worst performer this year of 94 primary indexes tracked by Bloomberg.

For U.S. investors, the picture isn’t quite as bleak. Because of the surging yen, the Topix is down 6.2 percent in dollar terms. Still, the S&P 500 Index is up 4.2 percent in the period.

“On a dollar basis, yes, the falls are less, but it doesn’t change the fact that Japanese shares have plunged,” said Norihiro Fujita, a strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “It doesn’t matter whether they’re hedged or not: Japanese shares aren’t an attractive investment.”

Stocks in Tokyo surged on Monday, with the Topix jumping 3.5 percent during the morning session as jobs data eased concerns over the U.S. economy and Japan elections signaled a convincing victory for the ruling parties.

Abenomics Bet

The Japan Hedged Equity Fund, known by its ticker DXJ, is attractive to investors betting the yen will weaken and the nation’s shares will rise, as happened in the earlier years of Prime Minister Shinzo Abe’s term. That comes with a downside: if the yen gains, investors forfeit the currency buffer against falling stocks. Investors have pulled $5.1 billion from the fund this year, the third-largest withdrawal of all U.S.-listed ETFs. The larger iShares MSCI Japan ETF has seen $4.8 billion in outflows over the period, the fifth-biggest amount.

The Japan Hedged Equity Fund, which invests in dividend-paying companies listed in Tokyo, has posted a 25 percent loss in 2016, while the iShares MSCI Japan ETF is down 4.5 percent.

“At the start of the year, only the hedged ETF was being sold,” said Masafumi Watanabe, ETF strategist at WisdomTree in Tokyo. “The non-hedged one also started to get sold later,” he said. “We started with an unwinding of DXJ, which is a bet on Abenomics that assumes a weaker yen and stronger stocks. Then we saw selling of the unhedged ETF, which goes long purely on Japan stocks themselves.”

The Topix index surged 51 percent in 2013, its best year since 1999, as the yen slid 18 percent against the dollar amid unprecedented stimulus by BOJ Governor Haruhiko Kuroda. This year, monetary policy isn’t having the same effect. The yen has jumped more than 20 percent against the greenback since the central bank announced a move to negative rates on Jan. 29, and consumer prices are again declining. Given that, Northern Trust’s McDonald says money is better off at home.

“We’re moderately underweight on developed international markets like Europe and Japan because we don’t see that same level of economic opportunity that the U.S. has,” he said.

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