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Don Dion's Weekly ETF Blog Wrap


Yen Policy Makes Japan ETFs Even Riskier

Posted 11/30/2009 2:22 p.m. EST

Open discussion of quantitative easing in Japan signals that the government is serious about weakening the yen, and the collateral damage could be enormous.

I warned of Japanese deflation and Japan ETFs earlier today, and the possibility of quantitative easing only reinforces the dire situation facing the nation.

After 20 years of on-again, off-again deflation and mild economic growth, Japan is reaching its debt limit. Failed inflationary policies and deficit spending have reduced the country's flexibility and narrowed its range of action.

"Demographic winter" has combined with those policies to deplete Japanese savings, to the point where there's risk of the savings rate going below zero. With currently low yields, Japan may need increased interest rates to attract foreign capital. Higher rates would likely push up the value of the yen and exacerbate the deflationary trend.

Japan equity ETFs have done poorly this year, with iShares Japan (EWJ) down 1.7% year to date through Friday. Small gains for other ETFs, such as iShares Japan Small Cap (SCJ), are the result of a stronger yen. CurrencyShares Japanese Yen (FXY) has gained 3.9% this year, and WisdomTree Dreyfus Japanese Yen (JYF) has gained 4.8%.

Even if the country is successful in combating deflation, it doesn't mean Japan is a buy. Japan's economic problems will keep equity prices from rallying too much, while the weakening yen erodes any gains.

On top of what are likely to be tepid gains at best comes the risk that extreme measures could trigger extreme moves in the market. Japanese credit default swaps increased in price this autumn and signaled that the market is growing more concerned about debt levels. Previous quantitative easing also made the yen the choice of carry-traders and helped fuel the bubble and then burst of global markets in 2008.

Investors may find it impossible to avoid the global effects of Japanese policy, but there's no need to increase exposure via Japan ETFs.


A special note from Don: Put simply, I want to help you profit from ETFs. You don't have to be an expert trader -- there are potential profits for investors at every level. And I think there's no better way to jump into the world of ETFs than through my brand-new service, TheStreet ETF Action by Don Dion. Membership is limited, so click here to get in on the action!

At the time of publication, Dion owned the iShares Dow Jones U.S. Pharmaceuticals Index Fund,

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

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