Japanese stocks have performed exceedingly well since Prime Minister Shinzo Abe initiated reformative initiatives earlier last year to boost the economy. The so-called “Abenomics” that mandated structural reforms and easy monetary policies, boosted investor confidence in Japanese equities, making Japan the best-performing developed market in the world.
Japanese stocks surged 56.7 percent in local currency terms last year as the yen tumbled and the Nikkei 225 index broke above a long-term downtrend line for the first time since early 1990s.
The Bank of Japan has been pumping liquidity in the economy and has been expanding the monetary base at an annual rate of about 60-70 trillion yen. The BoJ’s bond buying spree has kept a lid on the yields of Japanese Government Bonds (JGB) and, according to BoJ Governor Haruhiko Kuroda, interest rates will start to rise once inflation hits the central bank’s target of 2 percent.
Headline inflation in Japan hit 1.1 percent in October, indicating a marked improvement since May when it recorded a deflationary rate of 0.3 percent.
WisdomTree, the New York-based fifth largest US fund sponsor, has launched a new Japan-themed investment option amid such a backdrop that aims to benefit from a weakening yen and potential interest rate changes from the world’s third largest economy.
The WisdomTree Japan Interest Rate Strategy Fund (JGBB) tracks the WisdomTree Interest Rate Strategy Index, a benchmark that consists of long positions in US treasury bills having a maturity of less than three months and short positions in Japanese Government Bond futures with maturities ranging between 5-10 years.
The index takes a balanced approach in isolating the performance of the yen against the US dollar and the movements in the most liquid debt securities of the JGB markets. The long portfolio of US Treasury bills is rebalanced every month and weighted by market capitalization.
Similarly, the short portfolio of JGBs is rebalanced every month to accommodate newly issued securities by the Japanese government. The fund seeks to benefit from rising interest rates in Japan while protecting the gains through yen forward currency contracts.
The fund has an annual expense ratio of 0.5 percent.
Disclosure: No holdings