The Opportunity in Japan Is not Over by Christopher Gannatti, Associate Director of Research, The WisdomTree Blog

From the start of Abenomics —essentially November 30, 2012—through November 4, 2014, the (TOPIX) is up a cumulative 82%.1 This strong performance may inspire people to ask whether they’ve missed the rally, especially if over the same period:2

• The S&P 500 Index is up 48%.
• The MSCI EAFE Index is up 22%.
• The MSCI Emerging Markets Index is up 5%.

The bottom line is that, even in the face of these returns, we believe that the window of opportunity is still open.

A Decade’s Worth of Context

One way to contextualize the Abenomics move in Japan is to place today’s market levels into a historical context. The figure looks at the last decade.

Japanese Equities and Yen Still not at 2007 Levels (11/4/2004 to 11/4/2014)

Japan

Still Not Up to “Pre-Crisis” Levels: Another way to think about 2007 levels is to suggest where markets were prior to the Global Financial Crisis of 2008-09. As of November 4, 2014, the TOPIX was at 1369. That means it still needs to appreciate approximately 33% to reach1817, the value that it reached on February 26, 2007. At that time, the yen to U.S. dollar exchange rate was approximately 121, implying that from the current level of almost 114, nearly 6% of further depreciation would be needed.3

Profit expectations Improving: Even with the total returns of the TOPIX up more than 80% during the Abenomics period4, profit expectations have increased nearly 72% over the same period. We believe this to be one of the most important reasons why the valuation window in Japan has not closed. The S&P 500, the MSCI EAFE and the MSCI Emerging Markets Indexes have not seen anywhere near this level of change in profit expectations. The forward P/E ratio for the TOPIX has actually remained stable over this period, even in the face of the performance that was experienced.

Actual Profits Close to Record Highs: While profit expectations have improved, we believe that it is also important to note what actual profits have done. Using quarterly data from September 30, 2012 to June 30, 2014 (the latest available), we can see that profits have improved approximately 57%. In fact, as of the end of the first quarter of 2014, Japanese profits had achieved record levels of over 17 trillion yen.5

Room for Further Appreciation

We believe that the ultimate success of Abenomics will be judged over a period of multiple years, and while certain actions—especially those from the Bank of Japan—have been significant, others, like structural “third arrow” reforms, will take time. As we take in how far we’ve com

Important Risks Related to this Article

Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.
Investments focused in Japan are increasing the impact of events and developments associated with the region, which can adversely affect performance.

Click here to obtain a WisdomTree ETF prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks.

Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates, nor ALPS Distributors, Inc., or its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

Jonathan Steinberg, Jeremy J. Siegel, Luciano Siracusano III, Jeremy Schwartz, David Abner, Rick Harper, Sean Kelly, Christopher Gannatti, Bradley Krom, Tripp Zimmerman, Eswarie Subrahmanyam S. Balan, Zachary Hascoe, and Anita Rausch are registered representatives of ALPS Distributors, Inc.

WisdomTree Funds are distributed by ALPS Distributors, Inc.

You cannot invest directly in an index.