As the recovery has gained momentum in much of the Asian Pacific, Japan’s economy has struggled to find its footing, becoming a laggard in a region that has largely propelled itself out of the recession and established itself as one of the leaders of the new global economy. Australia has begun raising interest rates once again, while equity markets in Hong Kong, Singapore, and South Korea have seen a noticeable bounce lift them out of crisis. Yet Japan remains mired in an economic mess that threatens to result in another “lost decade” of stagnant growth and elevated unemployment.
When Japan’s economy grew at less than 1% per year between 1991 and 1999 (actually contracting in three of those years), a credit-induced boom of the late 1980s was largely to blame. Now a similar situation is playing out, with the added worry of prolonged deflation weighing on stocks. “The effects of deflation are apparent, and (the economy) is not yet on a self-sustaining recovery path,” said Fujio Mitarai, chairman of the Japan Business Federation, at a press conference this week.
The latest government data available shows that Japan’s core consumer price index dropped 2.3% year-over-year in September, the seventh consecutive monthly decline. While deflation is expected to moderate towards the end of the year, the Bank of Japan expects deflationary pressures to remain for the next two years. With the Bank of Japan policy board recently voting unanimously to leave interest rates at an ultra-low 0.1%, there is little room to maneuver.
There are some signs that the situation is improving. The Bank of Japan recently raised its outlook for the third consecutive month, saying in its monthly economic support that “Japan’s economic conditions are likely to continue improving, although the pace of improvement is likely to remain moderate for the time being.”
ETF Plays On Japan
In addition to being a key component in developed market and global equity funds, Japan is the sole focus of several U.S.-listed ETFs. Options for investors looking to gain exposure to Japanese equities through ETFs are relatively diverse, including small cap-specific funds and products with a tilt towards value stocks. ETFdb Pro members can read more about drivers of Japan ETFs in our ETFdb Category Report (if you’re not a Pro member yet, you can sign up for a free trial or read more here).
- iShares MSCI Japan Index Fund (EWJ): By far the most popular Japan ETF, EWJ has more than 330 individual holdings, and is tilted towards large cap Japanese companies such as Toyota, Honda, and Mitsubishi. EWJ has lost about 2% so far in 2009 and has an expense ratio of 52 basis points.
- SPDR Russell/Nomura Small Cap Japan ETF (JSC): Unlike EWJ, this State Street ETF focuses exclusively on small cap equities in Japan. JSC has more than 400 individual holdings and a weighted average market capitalization of just over $1 billion. This ETF is up less than 1% on the year after falling by about 10% over the last two months.
- WisdomTree Japan Total Dividend Fund (DXJ): For investors looking to gain exposure to Japanese equities while maintaining a relatively high dividend yield, this fundamentals-weighted ETF from WisdomTree may be an appealing option. The index underlying DXJ has more than 800 component companies, a dividend yield of about 2.3%, and a price-to-cash flow ratio of under 10.
For those risk-hungry investors who believe that Japan has further to fall before bottoming out, the ProShares UltraShort MSCI Japan (EWV) offers an efficient way to establish a leveraged short position.
Disclosure: No positions at time of those writing.