By Zacks Equity Research
After emerging out of the two-decade long stagnation in 2013 all thanks to “Abenomics”, Japan failed to sustain its winning momentum for most of this year. This is especially true as the world’s third-largest economy slipped into recession in the third quarter.
The economy shrank 1.6% annually in the last quarter after plunging 7.3% in the second quarter. The numbers were far below the market growth expectation of 2.1%. The softness primarily stems from an increase in the consumer tax rate from 5% to 8% levied in April that sharply lowered consumer spending (read: Top Ranked Japan ETFs and Stocks to Play Quiet Recovery).
The news of recession sparked off a heavy sell-off in the Japanese shares on Monday as the country’s Nikkei Stock Index suffered the biggest one-day decline of 2014, dropping 3% from a seven-year high reached last week on expanded easing policy measures and rising speculation of a tax hike delay. The decline, however, seems to be short-lived as the stocks recovered following Prime Minister Shinzo Abe’s renewed efforts to revive the ailing economy and fight deflationary pressures.
The government postponed the second tax hike planned for October 2015 until April 2017 and called for early election in mid December to seek a fresh mandate for his overall Abenomics, which hinges on three tactics – extreme monetary easing, flexible fiscal policy and structural reforms. Shinzo Abe will dissolve the parliament on Friday and is seeking to launch a new stimulus program, especially for smaller firms and regions.
The news came after Bank of Japan’s (BoJ) surprise expansion plan to the already massive monetary policy early in the month. The central bank has raised its bond buying to 80 trillion yen from 60–70 trillion yen per year and tripled the pace of purchasing stocks and property funds (REITs). Further, Japan is reallocating most of the $1.2 trillion public pension fund into riskier assets like equities and out of low-yielding Japanese government bonds (read: 2 Hedged Japan ETFs to Buy After the Surprise BOJ Stimulus).
Though the popularity of Abe subsided in recent days, the chance of his Liberal Democratic Party and its smaller coalition ally winning is still high. If Abe wins the snap election, he will push more reforms that will likely act as a new catalyst for the country’s economy, driving the stocks higher.
Further, the sliding Japanese yen, currently at a seven-year low, is benefiting exporters and the manufacturing industry, resulting in soaring stock prices. This is because Japan is primarily an export-oriented economy and a weaker currency makes its exports more competitive.
Given this, investors should keep a close watch on the Japanese stocks and could play their fortunes with lower risk through ETFs. In fact, Japanese stocks look cheaper than other developed market stocks at current levels.
ETFs in Focus
Currently, there are less than two dozens of Japanese equity ETFs trading in the U.S. market. While there are a handful that are relatively specialized, either tracking small cap benchmarks or dividend focused indexes, the most popular funds target the broad markets. Below, we have highlighted some of the broad ETFs that will be in focus in the coming weeks and have a favorable Zacks Rank of ‘2’ or ‘3’ (see: all Developed Asia-Pacific ETFs here).
Of these, the ultra-popular fund is iShares MSCI Japan ETF (EWJ) having a total asset base of $15.2 billion. This fund tracks the MSCI Japan Index and holds 310 stocks in its basket. Though it is slightly skewed toward the top firm – Toyota Motor – at 6.05%, other firms do not account for more than 2.70% of assets. It trades in heavy volume of 27.5 million shares per day and charges 48 bps in annual fees.
Another fund that provides a similar broad exposure to the Japanese stock market is Maxis Nikkei 225 Index Fund (NKY). This fund does not have the same level of AUM or volume as EWJ having nearly $87 million in assets and 215,000 shares a day in trading. But it follows a much more widely known index, the Nikkei 225. Here, Fast Retailing makes the top firm with 9.8% share while other securities hold less than 5.6% share in the portfolio. The ETF comes with a slightly higher annual fee of 50 bps (read: 3 Incredible ETF Buys Under $20).
Investors should note that both EWJ and NKY is a large cap centric fund with minor allocations to mid and small caps, and have consumer discretionary and industrials as the top two sectors. The products also have a Zacks Rank of 3 or ‘Hold’ rating.
Apart from these, Japan hedged funds – WisdomTree Japan Hedged Equity Fund (DXJ), db X-trackers MSCI Japan Hedged Equity (DBJP) and iShares Currency Hedged MSCI Japan ETF (HEWJ) – seem excellent picks. These ETFs offer exposure to the broad Japanese stock market while at the same time provides hedge against any fall in the Japanese yen. The trio has a Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting that these will outperform the markets in the coming months.
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ISHARS-JAPAN (EWJ): ETF Research Reports
MAXIS-NIK 225 (NKY): ETF Research Reports
WISDMTR-J HEF (DXJ): ETF Research Reports
DEUTS-XT MS JPN (DBJP): ETF Research Reports
ISHA-CH MS JAP (HEWJ): ETF Research Reports
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