It has been a year since Shinzo Abe took over as the Prime
Minister of Japan and launched an aggressive policy-popularly
known as "Abenomics"-to put the country back on the growth path.
The approach uses three arrows: the first arrow is drastic
monetary easing, second is flexible fiscal policy and the third
is structural reforms.
Abenomics has certainly put Japan back into prominence on the
global economic scene but how effective has it been to so far and
what lies ahead for Japan ETFs? (Read:
Obamacare will be Amazing for these stocks and
The economy grew at an impressive 4% annualized during the first
two quarters and though it slowed down to 1.1% during the third
quarter, economists expect it to rebound soon. Recent inflation
data suggests that the country may finally be coming out of the
two decade old deflationary spiral.
Core CPI increased 0.9% in October-its highest rise since
November 2008. BOJ hopes to achieve 2% inflation in two years.
Recently it also announced a "10% in 10 years' target". However
recent rise in inflation has been to a large extent due to the
weakening currency, which makes imports expensive.
A weaker currency made Japanese exports more competitive, though
weakness in emerging markets, the destination for about
two-thirds of Japanese exports has been posing some headwinds.
Will the Mexico ETF Shine in 2014?
Optimism over Abenomics led to a surge in the Japanese stock
market and a sharp decline in the yen earlier this year. But the
stock market rally began to stall when the yen started
strengthening in the summer. Rising geopolitical risks and the
fiscal uncertainty in the US led to a "safe-haven" rally in the
Further while the first two arrows appear to have been quite
effective, any tangible action involving the third arrow still
remains to be taken. Significant reforms, particularly in labor
and agriculture sectors, are critical to ensuring sustained
growth going forward. Also fiscal stimulus continues to put
strain on Japan's already poor fiscal heath, with public debt
over 230% of the country's GDP.
After losing steam for a couple months, the rally seems to be
picking up again of late. The yen is again touching new lows,
helped in part by the taper talk in the US. Further the Japanese
government announced another fiscal stimulus package worth 5.5
trillion yen earlier this month. The package is intended to
mitigate the impact of the upcoming sales tax increase and boost
Many economists believe that the Bank of Japan will also announce
further easing measures early next year. Also recent data
showed that exports as well as industrial production improved in
October. This morning's Tankan survey shows that Japan's major
manufacturers are their most upbeat in six years.
Nikkei stock index is now around 15,150--near its six-year high.
And, the yen is at almost 104 to the dollar--it's five-year low.
Given strong prospects of additional easing and recent pick-up in
the economic activity, it appears that the stock market rally may
gain momentum again. However the stock market's rise as well as
the currency's decline may not be as sharp as seen earlier this
While there is still a long way to go, the initial phase of
Abenomics has been successful to a large extent. According to the
IMF "in the near term, the challenge will be to achieve a
successful transition to the next phase of Abenomics, which
should be characterized by self-sustained, private demand-led
growth, and by a steady increase in inflation".
How have Japan ETFs Performed?
Japan ETFs -
WisdomTree Japan Hedged Equity Fund (DXJ)
b X-trackers MSCI Japan Hedged Equity Fund (
-t hat provide exposure to Japanese equities while hedging the
currency risk, have delivered stellar performance in the last one
year. While the more popular DXJ is up 44%, the lesser known DBJP
has managed to beat it with a mind-blowing 56% return. (see
DXJ vs. DBJP: Which is the Better Hedged Japan
). Both these products are Zacks Rank#2 (Buy) ETFs.
The largest Japan ETF
iShares MSCI Japan ETF (
has returned about 29%, almost matching SPY's performance over
the same period
This product does not hedge currency exposure. EWJ is Zacks
Rank#3 (Hold) ETF.
DB-XT MS JAP HD (DBJP): ETF Research Reports
WISDMTR-J HEF (DXJ): ETF Research Reports
ISHARS-JAPAN (EWJ): ETF Research Reports
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The Bottom Line
The initial phase of Abenomics has been able to revive the
economy that had remained stagnant for more than two decades.
While a lot of work still remains to be done, some of the recent
data and initiatives have been encouraging.
Further despite recent bull-run is equities and decline of the
yen; valuations are still close to historical averages. Two Japan
hedged ETFs DXJ and DBJP are worth considering as they now seem
poised to start their uptrend again.
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