Japan ETFs: One Year After Abenomics


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 ETFs)

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.

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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. (Read: 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 yen.

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 corporate investments.

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 average is now around 14,400 from around 12,200 in September 2008. The yen is now at almost 104 to the dollar from a high of 75.32 reached in October 2011. 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 year.

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) and db X-trackers MSCI Japan Hedged Equity Fund (DBJP)—that 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 ETF?). Both these products are Zacks Rank#2 (Buy) ETFs.

The largest Japan ETF iShares MSCI Japan ETF (EWJ) 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.


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 ETFs DXJ and DBJP are worth considering as they now seem poised to start their uptrend again.

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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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