The recession had hit hard the Japanese economy with
risk-averse investors avoiding volatile assets like stocks.
However, the economy's fate seems to have changed ever since
Prime Minister Shinzo Abe came into power after the mid-December
The once struggling Japan economy, under Prime Minister Shinzo
Abe, has seen asset prices shoot up, largely thanks to attempts
to end deflation and weaken the yen. The Nikkei and broad
Japanese stocks are roaring to multi-year highs as Bank of Japan
(BOJ) continues with its aggressive monetary easing policy.
In fact, in an effort to curb deflation and further weaken the
yen, BOJ recently disclosed another plan which was much more
aggressive than expected. This pushed the market and stocks
into bullish territory (
DXJ--Best ETF to Play the Japan Rally
BOJ's New Plan
The BOJ entered into a new era of monetary easing, which
included a huge inflow of money into the financial system that
has suffered from very low levels of spending and borrowing. The
central bank revealed its plan to expand the money supply and
achieve the 2% inflation target within a span of two years.
The BOJ's plans include buying $530 billion a year in
government bonds. The BOJ embarked on this plan with an intention
to keep interest rates low.
This will eventually spur spending and borrowing in an economy
which has suffered from stumpy business activity and low levels
of consumer spending. The central bank has also unveiled its plan
to buy riskier assets such as exchange traded funds and real
The impact of this stimulus package plan by BOJ on the market
is quite evident in the moves of Japanese Indexes and stocks. In
fact, Nikkei soared to levels not seen in the last four years,
and is now up 25% since the start of 2013.
At the same time, Shinzo Abe appears to be quite successful
another front, namely in the depreciation of the yen. The
measures taken by the bank to ease monetary policy resulted in
further weakness in the yen (
Japanese Yen ETFs: Any Hope in 2013?
The Japanese yen has tremendously declined against the U.S.
dollar and euro in the past four days, and indeed over the past
few months as well. Furthermore, many expect this trend to
continue far into 2013 as well, suggesting more pain could be
ahead for this currency.
While the yen's sharp decline has fueled the surge in Japanese
, the impact on
The CurrencyShares Japanese Yen Trust (
has been just the reverse. The fund has slumped to the extent of
14% in the year-to-date period on account of the weak yen.
FXY which has been designed to provide exposure to Japanese
yen is the worst performing ETF in the developed market currency
ETF space this year. Moreover, no better performance can be
expected out of the ETF going forward as the yen is expected to
further go down in BOJ's attempt to stir up inflation and aid the
FXY manages an asset base of $141.1 million and trades at
volume levels of more than 1 million shares a day. The fund
charges a fee of 40 basis points annually.
On the other side of the coin, the depreciation of the yen has
turned in favor of an export oriented economy like Japan. Japan
relies more on exports for growth and the slide in the yen has
provided a boost to the nation's export. A weaker yen makes their
products more competitive on the global stage shooting the profit
margins up for these key businesses (
Q1 ETF Asset Report: Japan ETFs Reign
In order to tap this growth in basket form investors should
turn to small cap Japanese funds as a way to play a recovery in
the world's second largest economy, seeking exposure to local
economies while avoiding mega cap stocks.
Below, we highlight some of the key details in the small cap
Japan ETF space for those looking to make an allocation to the
area for their portfolios:
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 is
best suited for Japan-focused investors seeking to invest in
dividend paying small cap firms (
For Japan ETFs, Think Small Caps
DFJ is the most liquid small cap fund with the highest trading
volume and assets under management in the small cap space. It
includes firms in its holding based on annual cash dividends
The ETF manages an asset base of $187.3 million and is
home to 482 small cap securities. Industrials, consumer
discretionary, financials, and materials enjoy double-digit
allocation in the fund.
The fund's performance has been quite remarkable in the
year-to-date period delivering a return of 11.56%. The fund
charges a fee of 58 basis points annually.
iShares MSCI Japan Small Cap Index Fund (
This ETF tracks the MSCI Japan Small Cap Index which is a
diversified benchmark of companies domiciled in Japan. The
product manages an asset base of $60.5 million and holds over 724
securities in its portfolio.
The fund puts just under 6.24% of total assets in its top ten
holdings, suggesting virtually no company specific risk. The
product charges 51 basis points a year in fees
In terms of sector exposure, financials and industrials both
take up slightly more than 20% and consumer discretionary round
out the top three with 19.9% of the asset base.
SCJ has returned 15.66% in the year-to-date period.
SPDR Russell/Nomura Small Cap Japan ETF (
JSC provides exposure to 388 small cap securities of Japan and
manages an asset base of $70.63 million. The fund charges a fee
of 55 basis points on an annual basis. Company-specific risk is
not an issue for this fund and so is concentration risk in the
top ten holdings which stands at a mere 6.24%.
Among sector holdings, the top three are the usual suspects,
namely, industrials, consumer discretionary and financials.
Information technology firms also get double-digit allocation in
the fund. The fund has returned 15.28% in the year-to-date period
Japan ETFs Stumble, Can They Regain Footing?
Shinzo Abe's goals clearly focus on monetary policy easing,
debt financing and considerable spending on infrastructure in
order to back inflation and boost the Japanese economy. However,
investors should note that ample liquidity in the market may
result in an artificial rise in asset prices.
Currently, Japanese ETF investments are looking more
interesting as we move forward in 2013. This is especially true
if the current trend in the market place holds and more gains are
seen in Japanese stocks.
If this continues, any of the small cap ETFs listed above
could make for solid picks. Plus, since much of the focus on
Japan has been on large caps like
, these funds could still be overlooked and prime choices for
investors to play the real story in the domestic Japanese
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
WISDMTR-JP SC D (DFJ): ETF Research Reports
WISDMTR-J HEF (DXJ): ETF Research Reports
ISHARS-JAPAN (EWJ): ETF Research Reports
CRYSHS-JAP YEN (FXY): ETF Research Reports
SPDR-RN SC JAP (JSC): ETF Research Reports
ISHARS-MS JA SC (SCJ): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for
the Next 30 Days. Click to get this free report