Japan should remain in focus in 2014, thanks to its
super-accommodative financial policy intended to increase
monetary base at an annual run of about 60-70 trillion yen.
Commonly known as "Abenomics" - implemented more than a year ago
- this policy measure has done a lot to bring Japan back into the
growth path. (read:
Japan ETFs: One Year After Abenomics
The Nikkei soared more than 50% in 2013, the best yearly
performance in more than 40 years for the key Japanese benchmark
and the Yen declined by about 14% against the greenback. Japan is
an export-oriented country and the slide in the yen provides a
boost to the nation's export making its products more competitive
on an international level.
However, the stock markets began to lose some steam in the
beginning of 2014 as the Yen gained about 2%. Rising concerns
over the health of the U.S. economy coupled with the pace of QE
taper and panic of political gridlock in some other countries led
to a "safe-haven" rally in the Japanese currency (read:
Volatility ETFs Skyrocket on Broad Market
This has probably fueled talks for some more easing in the
monetary stimulus. Though BOJ hasn't opted for further monetary
easing in the true sense as it has kept the base monetary target
intact, last week's announcement of the doubling of incentives
aimed at goading bank lending was a ray of hope in the current
Inside The Move
The Bank of Japan went for a twofold increase in its growth
funding facility to 7 trillion yen ($68 billion) allowing
individual banks to borrow twice at rock-bottom interest rates.
BOJ has also extended the
of the loans, making it easier for financial institutions to earn
more even in an ultra-low interest rate environment.
The move clearly underscores the government's intent to spur
growth and wipe out
years of deflation from Japan. BOJ expects these enhancements to
bolster credit growth both at business and household levels. BOJ
appeared content with the present growth and inflation scenario
BOJ's dovish stance came at an opportune time when Japan stocks
were sagging on stronger yen and a
GDP results for 4Q13. Soon after the announcement on February 18,
Yen dropped and Japan's Topix index soared to the
-month high level and Nikkei gained about 3%.
However, the cheer was short-lived as the Nikkei 225 Stock
on February 20, following IMF's warning of a potential global
slowdown shaping up in the near term. Weakness in China and rough
recovery in Euro zone also held back market activity.
Export volumes in Japan fell
% year over year in January leading to a record trade deficit,
despite a weak yen. Exports rose 9.5% while imports rose 25% on
muted yen and heightened demand for fossil fuels to compensate
for the collapse of its nuclear power in the 2011 Fukushima
While growth is presently a drag in Japan, we expect a spike in
domestic consumption for the upcoming month. The front-loaded
surge in demand prior to the consumption tax hike in April will
likely support Japan's 1Q growth profile.
Notably, the consumption tax is set to increase to 8% from April
1 from the current level of 5%.
expect the central bank to take more steps to reduce the impact
of the tax rise and aid the recovery.
In such a scenario, it would be prudent to cash in on Japan's
private consumption with a very short-term view and some
small-caps which are relatively less open to foreign exposure
Is Another Great Year Ahead for Japan ETFs?
Investors willing to seize this short-term positive blip might
consider investing in the following Japan equity ETFs. All three
funds currently have Zacks Rank #3 (Hold).
WisdomTree Japan SmallCap Dividend Fund
For better access to the core Japanese markets, investors can
look to invest in small cap securities of Japan through
DFJ. This is best suited for Japan-focused investors
seeking to invest in dividend paying small cap firms (read:
Small Cap Japan ETFs: Overlooked Winners?
DFJ is the most liquid small cap fund with the highest trading
volume and assets under management in the small cap space.
The ETF invests about $282.4 million in 554 small-cap
securities. Industrials, consumer discretionary and financials
enjoy top-three allocations in the fund. This industry exposure
makes the fund more apt to profit from the latest loan program
and the front-end loaded consumption demand.
The fund is equally weighted and does not bear concentration
risk. The fund charges a fee of 58 basis points annually. While
most of the Japan ETFs saw big-time losses so far this year (as
of February 20), DFJ shed a marginal 2.84%.
iShares MSCI Japan Small Cap Index Fund
With an asset base of $131.7 million, this ETF tracks the MSCI
Japan Small Cap Index which is a diversified benchmark of
companies domiciled in Japan. SCJ holds over 765 securities in
its portfolio with only 5.55% invested in the top 10 holdings.
The product charges 48 basis points a year in fees.
In terms of sector exposure, industrials take up about 25%, while
consumer discretionary and financials round out the top three
with about 18% of the asset base. SCJ has lost 3.70% in the
SPDR Russell/Nomura Small Cap Japan ETF
JSC provides exposure to 464 small cap securities of Japan and
manages an asset base of $80.6 million. The fund charges a fee of
55 basis points on an annual basis. Company-specific risk is not
an issue for this fund. Among sector holdings, the top three are
the obvious guesses, namely, industrials, consumer discretionary
and financials. The fund is down 4.28% year to date.
Japan's future growth is largely dependent on the BOJ's stimulus
program, the pace of the Fed's QE scale-back and overall global
recovery. Majority of the
expect the BOJ to inject more stimuli by the end of September,
according to a Bloomberg News survey conducted from February 6 to
If this takes place and the Fed keeps axing on its stimulus, Yen
will likely fall against the U.S. dollar which in turn will help
Japan's export-reliant economy. However, just falling currency
will not be sufficient enough to carry on Japanese growth; the
volume of exports also needs to be healthier. Amid such a
volatile backdrop, it would be wise to focus on Japan's domestic
consumption, for the time being.
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WISDMTR-JP SC D (DFJ): ETF Research Reports
SPDR-RN SC JAP (JSC): ETF Research Reports
ISHARS-MS JA SC (SCJ): ETF Research Reports
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