As I have previously written, I am looking for $US to appreciate over the next six months. Down the road, the corresponding weakness in the Yen will be good for the large Japanese exporters, which are well represented in EWJ. However, any strength in underlying stocks will likely be lost once translated to $US.
Furthermore, Japan's economic future is now far from certain - two decades of deflation, aging demographics, huge government debt and dwindling personal savings are not helping. And so I am concerned that once the world gets over troubles in Europe, and especially in the unlikely event that Bernanke and the Fed are reasonably successful in the meantime reflating the US consumer economy by stoking inflation, all attention will turn to the much bigger problem that is Japan.
This eventuality carries a sizable downside risk for Japanese equities and without a correspondingly large upside potential, I see no reason to stay in Japan. The choice to jump ship before the end of the year is motivated by my desire to minimally offset unusually large capital gains I have taken earlier in the year, when it looked certain that the capital gains tax reduction we enjoyed in recent years would be no more. Now that chances for an extension in preferential treatment of capital gains beyond 2010 are much brighter, reducing current year’s tax burden makes more sense.
I ridded my portfolio almost entirely of exposure to Japan by selling my entire EWJ position today at $10.39 /share. My total loss in EWJ including dividends, but ignoring commissions over the little more than three years that I was in it is 21.1%.