The Perfect Japanese ETF For Tuesday's Action (EWJ, DXJ, FXY)

The two-day policy meeting for the Bank of Japan (BOJ) ended over night and the central bank voted unanimously to keep the pace of its monetary easing the same.

They stated that the Japanese economy continues to recovery moderately, also unchanged from the previous meeting. The big news was that news the BOJ would double the scale of its programs that lend to banks in hopes of stimulating both the loan market and the economy.

The news sent the Japanese yen lower and Japanese stock higher.

The yen and stocks historically have had an inverse relationship due to the fact that the large Japanese stocks are exporters. A weaker yen makes the exporters good more attractive to other countries as their currencies are able to buy more Japanese goods.

The goal of Prime Minister Shinzo Abe has been to push what is termed Abenomics." By weakening the yen it will help propel the economy and at the same time fight deflation. So far the results are mixed, but from the tone of the meeting this week the BOJ will not let their foot off the gas as they are determined to continue to weak the yen and attempt to boost the economy and stock market.

Investors have a few options when it comes to playing the Abenomics trend for the next 12-18 months. The iShares MSCI Japan ETF (NYSE:EWJ) is a basket of over 300 Japanese stocks that offers a diverse exposure to the large-cap asset class in the country. The one issue with EWJ is that a weak yen will be good for the stocks, but when the currency is converted back into U.S. Dollars it hurts the performance of the ETF.

To combat the currency fluctuations, investors should consider the WisdomTree Japan Hedged Equity ETF (NYSE:DXJ). The ETF will also invest in a basket of Japanese stocks, however the difference is that DXJ will be short the Japanese yen to mitigate currency fluctuations.

The performance can differ greatly between the two ETFs based solely on the currency hedge. In 2013, EWJ had a good year with a gain of 25 percent, but due to a weak yen throughout the year, DXJ was up 38 percent.

A final option would be to simply short the Japanese yen and not take any exposure to the Japanese stock market. Investors that are sophisticated enough to short ETFs can open a short position in the Rydex CurrencyShares Japanese Yen ETF (NYSE:FXY), which tracks the yen versus the U.S. Dollar.

Today, DXJ is set to up with a big gain as investors realize the Shinzo Abe is a determined man. Investors that believe the Abenomics theme will continue for the foreseeable future should consider DXJ as the odds of both the yen falling and the Japanese stock market rising are high.