In the wake of the recent global recession, many investors have looked to Asia to lead the way to recovery. Emerging economies such as China and India have continued to expand at impressive pace, while Australia was recently one of the first developed markets to raise interest rates. But among these hot zones, Japan remains mired in an economic slump that is threatening to result in another “lost decade” for the world’s second largest economy. Many national stock markets have risen sharply in 2009, but Japanese benchmarks remain nearly flat, unable to gain any traction towards a return to growth.
Despite some hopeful signs – cautions optimism over corporate earnings and unemployment has sprung up – Japan has sunk back to deflation and stocks have been hammered by the yen’s strength relative to the U.S. dollar. Now, the Japanese government is preparing its third massive stimulus package of the year, planning to inject nearly $80 billion in a controversial effort to jump start the sputtering economy.
Third Time A Charm?
The latest version of the stimulus plan would generate billions of dollars of fiscal spending, including environmental projects and efforts to promote earthquake-proofing of homes to boost the building market. Japan’s stock market has surged over the last week on hopes that the new plan would prove more effective than the first two cash injections this year.
The stimulus was expected to be approved last week, but has now been delayed by political disagreements. Although the plan as proposed includes nearly $80 billion of new spending, some believe that the amount should be more, and that going forward at current levels will result in failure. Although the Democratic Party of Japan swept to a historic victory in August, prime minister Yukio Hatoyama has been hesitant to overrule his junior coalition partners, including Shizuka Kamei, leader of the People’s New party and minister for financial services. Kamei has said that the government should spend whatever it takes to ensure a recovery.
Some analysts believe the delay of the stimulus reflects the weakness of the current governing alliance, perhaps signaling deeper problems in the Japanese economy in years ahead. Others believe that government efforts should be focused elsewhere, such as the oft-criticized corporate tax system. “Less than 30 per cent of Japanese companies booked a profit for tax purposes last year — a figure that implies either that the majority of the economy makes no money at all, or that corporate tax evasion is rife at all levels of business,” writes Leo Lewis.
ETF Plays On Japan
For investors who believe Japan may make a push to catch up with the rest of the world, there are several exchange-traded products offering various levels of exposure to the market (see a complete list here). These ETFs include:
- iShares S&P/TOPIX 150 Index Fund (ITF): Linked to the S&P Tokyo Stock Price Index, this ETF offers exposure to many of the largest publicly-traded Japanese companies. Although listed in Japan, ITF’s largest holdings are generally global companies that operate around the globe, such as Toyota, Honda, Mitsubishi, and Canon.
- SPDR Russell/Nomura Small Cap Japan ETF (JSC): Whereas ITF features primarily mega-cap companies, JSC focuses on small cap Japanese equities. The index underlying this ETF has a median market capitalization of just $235 million. JSC offers impressive depth of exposure, investing in nearly 400 individual securities.
- WisdomTree Japan Total Dividend Fund (DXJ): This ETF invests in dividend-paying companies in Japan, and determined allocations based on cash dividends paid. Many of the largest companies held by this fund are large, well-known companies, including Honda, Toyota, and Panasonic.
Inverse ETF Options
For those who believe the thought of another stimulus package has given false hope to an economy that remains fundamentally weak, there are ways to bet against the Japanese markets through ETFs as well. The ProShares UltraShort MSCI Japan (EWV) seeks to deliver daily returns equal to -200% of the daily returns on the MSCI Japan Index.
Disclosure: No positions at time of writing.