Several decades of deflation and miserable market conditions
have made revival in the Japanese economy in the near-term a
difficult possibility. The economy has been in recession time and
time again, while the debt burden is reaching legendary
Some strength in the yen made the circumstances worse, and
hurt the exporters of the world's third-largest economy. The
currency gained strength, and Japanese equities fell, resulting
in investors' exit from Japanese equities (
Asia Ex-Japan ETF Investing 101
However, the national elections may have turned the fate of
the economy. The new government under Prime Minister Shinzo Abe
came into power after the mid-December elections, and broad
Japanese ETF investments surged as his party took command of the
The index posted a gain of 23% for 2012, closing at 10,395.
The Index had posted a 21-month high exceeding at 10,400 a day
before the year end, with many feeling more optimistic about
investments in the future.
This reversal in fortune is largely thanks to hopes for a more
aggressive monetary and fiscal policy. This program looks to
revive the economic growth of the country while eliminating
deflation once and for all.
Prime Minister Shinzo Abe has asked for unlimited monetary
easing by the Bank of Japan in order to weaken and stabilize the
currency in order to accomplish this goal. Abe has also set a
target for inflation at 2% in order to reverse decades of
deflation. The government has also threatened the Bank of Japan
with loss of independence if it fails to provide unlimited
The aggressive monetary policy and expectation of further
easing, has reduced the yen to lower levels. The yen has dropped
to levels of 87 or more to the U.S. dollar, a level not seen
since mid-2010. (
Japanese Yen ETFs: Any Hope in 2013?
If the measures taken by the government to ease monetary
policy work and result in further depreciation of the yen, this
will turn out to favor an export oriented economy like Japan.
Japan relies more on exports for growth so a weaker currency
could be to its overall benefit.
However, foreign investors should note that weakening of the
currency may impact their positions in Japanese equities. It has
been noticed that a fall in the yen has negatively impacted the
performance of many funds that are unhedged. In such a scenario,
currency hedged positions may result in more returns to a foreign
investor than the unhedged ones, at least of the trends hold.
The Key to International ETF Investing
Either way, Japanese ETF investments are looking more
interesting as we get further into 2013. This is especially true
if the current trend in the market place holds and more gains are
seen in Japanese stocks.
Investors looking to capture this revival in the Japanese
economy can look to invest in
tracking the equities of the economy. Below we have briefly
highlighted some of the ETFs of Japan that an investor may want
iShares MSCI Japan ETF (
For broad exposure in the Japanese market, investors should
look to EWJ. The fund is the oldest and most popular ETF tracking
the Japanese market.
EWJ offers liquidity to investors with a trading volume of
more than 40 million shares a day. The fund has $5.4 billion
assets under management which it invests in a large basket of 312
Japanese securities (
A Technical Look at the Japanese ETF (EWJ)
The ETF offers the benefit of diversification to investors
with a low concentration in the top 10 holdings. The fund invests
only 24.04% of its asset base in these top holdings.
It thereby rules out company risks to a large extent. In terms
of individual holdings, Toyota Motor Corp takes the top spot
while Mitsubishi and Honda occupy the second and third positions
Among sectors, Consumer Discretionary, Financials and
Industrials are given the top three priorities. The fund charges
an expense ratio of 51 basis points a year.
Since EWJ is an unhedged ETF, its performance was somewhat
hurt by the strengthening of the dollar against the Japanese yen.
However, the product has still been a star performer as of late
adding double digits over the past few months.
WisdomTree Japan Hedged Equity Fund (
DXJ was one of the best performing ETFs in the Japanese space
after the attempt to revive the economy through aggressive
monetary easing. That is because DXJ has been designed to provide
a hedge against currency exposure, a reason why the ETF
experienced a huge amount of inflow in the past few weeks.
DXJ offers a broader play on the Japanese stocks providing
exposure to 271 stocks. Mitsubishi UFJ Financial Group, Canon Inc
and Takeda Pharmaceutical Co Ltd are the top three choices of the
In terms of sectors, Industrials dominate the holding pattern
while Consumer Discretionary, Information Technology, Health Care
and Materials also get double digit allocation in the fund. The
fund charges a fee of 48 basis points on an annual basis
Currency Hedged ETFs: Top International
Considering that the Prime Minister's believes that
a weak currency will aid the economy
, investment in DXJ could turn out to be solid choice for
investors. This has been the case so far, as DXJ has outperformed
EWJ by a wide margin in the trailing three month period, although
there is no telling if this will continue.
Maxis Nikkei 225 Index Fund (
This ETF tracks the Nikkei 225 index and is home
to-unsurprisingly-- 225 Japanese securities. The fund charges a
fee of 51 basis points annually, and it tracks what is termed by
many as the DJIA of Japan.
Investors should note that if Abe is successful in its measure
to weaken the yen and revitalize the export of the country, this
fund could be a strong performer. NKY is heavily exposed to
Japanese exporters, so it could see a boost from a weakened
Is NKY A Better Japan ETF?
Despite a large basket of securities, the fund has nearly 33%
of asset base in the top ten holdings. Among individual holdings,
Fast Retailing, Fanuc Ltd and SoftBank Corp occupy the top three
positions while Japanese auto giants Toyota and Honda hold the
fifth and tenth positions in the fund.
Lastly, consumer discretionary securities dominate the
performance of the ETF as the fund has 21.8% of asset base
invested in it. Among others, the fund does not invest more than
WisdomTree Japan SmallCap Dividend Fund (
For better access to Japanese markets, investors can look to
invest in small cap securities of Japan through DFJ. This product
is best suited for overseas investor seeking to invest in small
cap firms. (
For Japan ETFs, Think Small Caps
The fund is the most liquid small cap fund with highest
trading volume and assets under management in the small cap
space. It includes and weight firms in its holding based on
annual cash dividends paid.
The fund is home to 411 small cap securities and charges a fee
of 58 basis points. On account of its dividend focused approach,
it generates a good yield of 3.34%. Industrials, Consumer
Discretionary, Materials and Financials enjoy double digit
allocation in the fund.
db-X MSCI Japan Currency-Hedged Equity Fund (
With the yen sliding, DBJP is an interesting option to pick
with the Japanese economy set to revive after four years of
continuous recession and two decades of deflation.
DBJP tracks the MSCI Japan US Dollar Hedged Index, which
provides exposure to Japanese equity markets and hedges the
Japanese yen to the U.S. dollar by selling Japanese yen forwards.
Is It Time To Buy The Hedged Currency ETFs?
However, DBJP does not appear to be as popular as DXJ. Since
its inception, the fund could manage to amass an asset base of
just $5.4 million and trade at very low volume levels. In terms
of the total portfolio, like DXJ, it also has its asset base
spread across a large basket of over 250 securities.
Among sectors exposure, Industrials is the top priority
followed by Consumer Cyclical and Financial Services. This fund's
expense ratio is just 2 basis points higher than DXJ, charging a
fee of 50 basis points on an annual basis.
SPDR Russell/Nomura PRIMETM Japan ETF (
JPP seek to match the performance of the Russell/Nomura Prime
Index. The fund uses a sampling strategy which leads to 390
securities from a total 1000 securities in a larger index. The
fund doesn't appear to be that popular among investors though, as
its trading volume is just 13,300 shares a day.
The diversified fund lists Japan's three auto giants Toyota,
Mitsubishi and Honda as the top three holdings. Among sector
holdings, Industrials, Financials, Consumer Discretionary and
Information Technology get double digit allocation in the
The impact of Abe's measures to revive the economy could be
seen in its performance as of late, which has easily beaten out
the S&P 500. However, this product does cost a bit more than
SPY, costing investors 50 basis points annually.
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DB-XT MS JAP HD (DBJP): ETF Research Reports
WISDMTR-JP SC D (DFJ): ETF Research Reports
WISDMTR-J HEF (DXJ): ETF Research Reports
ISHARS-JAPAN (EWJ): ETF Research Reports
SPDR-RN PR JAP (JPP): ETF Research Reports
MAXIS-NIK 225 (NKY): ETF Research Reports
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