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Though Japanese equities were in the black last week, the Bank of Japan’s efforts to weaken the yen are killing returns for dollar-based investors, demonstrating once again how much currency fluctuations affect global investment markets.

ETFs such as the iShares MSCI Japan Index Fund (NYSEArca:EWJ — News ) and the Maxis Nikkei 225 Index Fund (NYSEArca:NKY — News ) were up on the week, but underperformed by more than 1 percent when paired against the yen-denominated versions of their underlying indexes. EWJ returned 2.1 percent last week, but U.S. investors, accounting for the yen’s slide, made just 1 percent.

Though the yen rallied massively in 2011 against the dollar, 2012 so far has been about reversing those gains, as the BOJ works to weaken the yen through assets purchases that are keeping a lid on bond yields. The weaker yen means that when U.S. investors in Japanese equities convert their gains in yen-denominated equities back into dollars, returns are hurt.

While the BOJ’s asset purchases of 10 trillion yen ($128 billion) may stimulate Japan’s export-driven economy, it has some very real consequences for U.S. investors in the short term. Over the past three months, the asset buying has caused U.S. investors in Japan to underperform their Japanese counterpoints by more than 8 percent, as IndexUniverse’s weekly Currency Impact Report shows.

That said, U.S. investors interested in Japanese exposure have tools in the ETF market to neutralize the currency variable, as IndexUniverse ETF Analyst Dennis Hudachek pointed out in a recent blog .

The WisdomTree Japan Hedged Equity Fund (NYSEArca:DXJ — News ) and the db-X MSCI Japan Currency-Hedged Equity Fund (NYSEArca:DBJP — News ) are currently the only offerings in the Japanese ETF currency-hedged space.

As the yen has fallen, DXJ and DBJP have outperformed their nonhedged counterparts by mimicking the returns of local Japanese investors.

Other Currency News

The euro-dollar cross also affected investors last week, as Europe’s common currency reversed its losses from the previous week. The British pound also strengthened against the greenback.

The iShares MSCI Germany Index Fund (NYSEArca:EWG — News ) saw a boost of about 0.41 percent over the course of the week due to gains in the euro. Their overall returns were 4.12 percent.

Investors in Britain saw the largest currency gains:The iShares MSCI United Kingdom Index Fund (NYSEArca:EWU — News ) outperformed the pound-sterling-denominated version of its underlying index by nearly 1 percent. Overall, returns for U.S. investors in the U.K. were almost 2.5 percent last week.

More information and data on currency performance is available in the IndexUniverse Currency Impact Report .

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