Japan ETFs are attracting assets from global investors as they are confident that leader Shinzo Abe will win the snap election on 22 October.
Investors pumped around $258 million into Japanese ETFs over the past week, following outflows of more than $740 million in September as Abe announced the election.
Surprising results in the election could not only derail the yen but also change the central bank’s monetary policies, which have formed the backbone to global investors’ buying and selling decisions in recent years.
North Korea aggression boosts confidence in Abe
The cautious optimism comes as incumbent prime minister Abe’s approval ratings have improved following his calls for aggressive action against North Korea as tensions escalate between the two nations.
North Korean leader Kim Jong Un has tested a series of intercontinental missiles and reportedly a hydrogen bomb this year, as well as flying a ballistic missile over Japan on 15 September. In response, Japan has launched a satellite to destroy missiles from the dictator.
Japan ETFs are familiar with Abenomics
Investors are reassured that Abe and his Liberal Democratic Party, currently governing in coalition with centre-right Komelito party, will be voted back in again this month and possibly be given even more power. They are familiar with Abenomics and his policy stances such as monetary stimulus and a weak yen.
The pattern of global investors has not extended to all US-domiciled Japanese ETFs, however. The $16.4 billion iShares MSCI Japan ETF (EWJ) is up 16% over one year in USD terms yet it has lost more than $121 million over the past month.
The turnaround in Abe’s approval ratings should be a welcome relief for investors after personnel scandals and criticism of his handling of the domestic economy.
Election could derail Japanese yen
The election could affect the yen. It suffered a choppy September as the US dollar rallied 2.2% against it, and a surprise election outcome could spur a renewed dollar-yen rally.
Abe is not guaranteed victory, and a FX fluctuation could be a likely result in the lead-up to 22 October.
Abe faces several competitors, including Tokyo governor Yuriko Koike, who is standing for the newly-established Party of Hope. She vows to phase out nuclear power by 2030, freeze sales tax and potentially end Japan’s easy monetary policy.