The Japanese economy - which was stalled out by the disaster
caused by an earthquake and tsunami in March 2011 and a
long-stretched deflationary rut - waited for a turnaround for quite
some time and seems to have found it lately.
Along with 'Abenomics' - a reformative initiative introduced by the
Prime Minister Shinzo Abe early this year-- modest overseas
recovery has also played a vital role in the nation's recent
Like several other developed nations, the key tool of the Japanese
reform was the adoption of a massive monetary and fiscal stimulus
scheme. The Bank of Japan follows a policy to increase Japan's
monetary base at an annual run of about 60-70 trillion yen.
This injection of artificial liquidity will continue until the
inflation target reaches 2%. The overall recovery trail helped
drive investors' sentiment lately.
Weak Yen, Export Boom, Surging Market Steal the
Fortunately, the reformative measures paid off with the economy
ending a long string of deflation in
June this year
. Also, as much as a 16% drop in Japanese currency (Yen) relative
to the greenback so far this year triggered export growth in
October leading share prices into a rally.
The benchmark Nikkei 225 Index reached a six-month peak on November
22 with some busy trading across the board. The benchmark Nikkei
has gained an impressive 44% which was one of the best performances
among major indices.
Expectations for corporate earnings are up thanks to a depreciation
of the yen versus the dollar. The wakened currency basically raised
Japanese companies' export competitiveness,
as per Reuters
In fact, growing competition from Japanese suppliers armed by a
weaker currency could be a reason for the weak show in the Chinese
manufacturing data in November (read:
iShares Files For 3 Currency Hedged ETFs
The benefit gets realized even more when the companies operating
abroad send the money earned in dollar terms back home. Japanese
auto behemoths -
Toyota Motor Corp.
Honda Motor Co Ltd
) - are among the beneficiaries of this repatriation.
As if these were not enough, a low interest rate from 'Abenomics'
helped create ripples in the property market of Japan as well as
supported industrial growth which is reflective of the stock market
What Lies Ahead?
The path ahead is mixed with possibilities and perils. On a
positive note, Japanese equities presently carry a 12-month forward
price-to-earnings of 14, as per Reuters.
Regardless of the recent rally, price-to-earnings ratio hovered
below a 10-year average of 16.1 and most importantly, less
expensive than the S&P 500's 14.9 times (see
Japan ETFs: Six Ways to Play the Surge
On the flip side, the trade balance was unfavorable even after the
inspiring export data in October as import growth was faster than
that of exports. The import of fuels to make up for the collapse of
its nuclear power industry hurt the trade balance figures.
While advanced nations contributed to Japan's export profile, the
numbers are still weak from emerging nations. The domestic demand
profile is improving, but some feel that the trend might reverse
with a national sales tax hike
which in turn might cripple household spending.
The market expects the Japanese growth to pick up in the final
quarter of the year assisted by a recovery in exports as well as
private consumption prior to the sales tax hike.
Investors willing to seize the possibilities in one of fastest
growing developed nations but avoid its tumbling currency, might
consider some hedged Japan equity ETFs (read:
WisdomTree Doubles Down on Hedged Japan ETF
To name a few options, we have
WisdomTree Japan Hedged Equity Fund
db X-trackers MSCI Japan Hedged Equity Fund
) both of which returned a minimum of 35% in the year-to-date frame
and have positive Zacks ETF Ranks #2 (Buy).
WISDOMTREE JAPAN HEDGED EQUITY
Launched in June 2006, DXJ looks to track the WisdomTree Japan
Hedged Equity Index and offer investors a way to gain exposure to
Japanese shares devoid of currency risks. This is a liquid choice
in the space with 6,500,000 shares in average trading volume a day.
The large-cap oriented fund has a huge asset base of $11.2 billion
and charges 48 bps in fees (see
DXJ vs. DBJP: Which is the Better Hedged Japan
). With a total of 313 holdings in its basket, the top 10 stocks
contribute around 35% of the total assets calling for decent
Mitsubishi, Toyota Motor and Canon take the top three spots of the
fund. Growth stocks account for just one-third of the total fund
signaling stability in the product.
db X-trackers MSCI Japan Hedged Equity Fund (DBJP)
Launched in June 2011, DBJP tracks the MSCI Japan US Dollar Hedged
Index offering exposure to Japan and a hedge against any fall in
the currency (against the dollar). It is a bit overlooked choice in
the space with only $245.5 million in AUM and about 100,000 shares
in average volume. The fund charges 50 bps in annual fees.
The product holds 321 stocks in total and its top 10 holdings
contribute around 24% to the fund. Top three holdings include the
surging Toyota, Mitsubishi and Softbank. Honda Motors occupies the
third place. Notably, Softbank has been a star performer in the
DBJP is governed by large cap stocks with a tilt toward growth
stocks which account for around 43% of the product.
The Japanese economy needs to do a lot more to alleviate all its
issues. Things are mostly dependent on boarder market recovery as
this regulates the country's export profile as well as the pattern
of domestic consumption.
The world's third largest economy might succumb to a slowdown next
year once the taper concern resumes in the U.S., if not later this
month. Also, a slow recovery in Europe and China and domestic
austerity measures may come in the way of a full-fledged economic
Still, Japan's future is relatively bright in the short term, and
investors who think more yen losses are coming-- but that stock
prices in the nation can still rise-- might be best served by
looking at either of the aforementioned ETFs for exposure.
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 >>
DB-XT MS JAP HD (DBJP): ETF Research Reports
WISDMTR-J HEF (DXJ): ETF Research Reports
HONDA MOTOR (HMC): Free Stock Analysis Report
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