Will Election Results Send Japan ETFs Lower?

by on August 28, 2009 | ETFs Mentioned:

Over the next 48 hours, a world superpower, home to one of the largest global economies, will head to the polls, with all indications that the Democratic Party, running a campaign promising thorough overhauls (as evidenced by the campaign slogan “Change”), will score a resounding victory and wrestle power from the long-ruling party.

Sound familiar?

Mount FujiAll eyes will be focused squarely on Japan this weekend, as polls show that the Democratic Party of Japan, a party barely a decade old, is expected to win a landslide victory over the Liberal Democratic Party, which has ruled Japan for more than a half century. Such a win would likely allow the DPJ to enact series of reforms, including a domestic-spending plan, climate-change initiatives, a reduction of government bureaucracy, and a reassessment of relations with the U.S., according to the Wall Street Journal.

The incumbent party has been hounded by scandals, and burdened with an economy hit hard by the global recession. Unemployment continues to rise in Japan, and declining tax revenues have created a massive debt burden. In another trend reminiscent of the recent U.S. elections, young urban voters are among the most vocal supporters of the reform minded DPJ, which is promising higher minimum wages and more job security.

Sunday’s elections could represent a significant moment for the Japanese economy. The DPJ is proposing massive spending programs that would be funded partially out of elimination of unnecessary government jobs and reducing the influence yielded by bureaucrats. Not surprisingly, corporate executives are hesitant to embrace the DPJ’s policies. Many companies are looking to send jobs overseas in an effort to reduce costs. The DPJ plans to raise the minimum wage, increase job security, and stop the hiring of temp workers in Japanese factories. Some business leaders worry that such actions will reduce Japan’s global competitiveness and further stunt economic growth. Critics propose lowering Japan’s corporate tax rate, which is currently among the highest in the world, to attract foreign investment and revitalize the economy.

Japan ETFs: Options Aplenty

For investors looking to make a play on the Japanese markets, ETFs offer an abundance of choices. In addition to many diversified Asia Pacific ETFs, there are several pure play ETFs focusing exclusively on Japanese equity markets, including:

  • iShares MSCI Japan Index Fund (EWJ): A broad-based fund, EWJ has more than 330 holdings, and offers diversified exposure to all sectors of the Japanese economy. EWJ, which has an expense ratio of 0.52%, has gained about 7% this year.


  • SPDR Russell/Nomura Small Cap Japan (JSC): This ETF offers exposure to small cap Japanese equities, holding companies with an average market capitalization of less than $500 million. JSC has an expense ratio of 0.55% and has gained about 13% so far in 2009.


  • WisdomTree Japan SmallCap Fund (DFJ): DFJ also offers exposure to small cap companies trading in Japan, but determines the weightings of holdings based on annual cash dividends paid. DFJ has jumped about 9% in 2009, and has an expense ratio of 0.58%.

View the Japan Equities ETFdb Category page for a complete list of ETFs offering exposure to the Japanese equity markets.

Disclosure: No positions at time of writing.