The primary Japanese stock benchmark, the Nikkei 225, reached a level of just over 39,000 in December of 1989. The index is currently hovering around 10,900, a grim reminder of the economic difficulties encountered by the one-time global powerhouse. In other words, the island nation has been in a serious slump for close to a quarter century now. However, with the rise of many emerging countries in Asia, Japan may finally be able to lift itself out of its 20+ year malaise by exporting its impressive technological know-how and quality goods to the emerging middle class of Asia.
Exports from the world’s second biggest economy (Japan maintains a razor-thin margin over China) rose sharply when compared to the same period a year ago. Exports to the United States jumped 50% in February from a year earlier, and analysts calculated that U.S.-bound exports also posted a double-digit gain in seasonally adjusted, month-on-month terms. “The figures overall underline the view that exports are on an uptrend, and the trend may well have strengthened,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute. Among the best performing segments were auto shipments to the United States and electronics parts to Asia, which helped Japan to post the third-biggest annual gain on record.
Japan and Mainland Asia
Japan is becoming more and more dependent on China and other mainland Asian countries (such as South Korea) as export markets. In fact, despite the large increase in exports in year-over-year terms, exports slipped 1.7% when compared to the previous month due to a slow down in exports to China as much of the country shut down for the Lunar New Year. This event underscores just how important China has become to Japanese trade; the country is now Japan’s No.1 export destination. Furthermore, as America fights through its slump and combats high unemployment and consumer debt levels, Japan is forced to look to Asia for consumers willing and able to spend money on imports.
Japan has also been able to do many of its deals in Asia in yen, which allows the country to avoid some of the issues that come with currency appreciation which could possibly make Japanese goods too expensive for local consumers to purchase. “Being paid by their overseas trading partners in yen, instead of dollars or other foreign currencies, shields Japanese companies from exchange-rate losses when those earnings are sent back to headquarters in Japan,” writes Andrew Monahan, who went on to note that roughly half of Japanese exports will be paid with yen.
The most popular ETF that tracks the Japanese equity market is iShares MSCI Japan Index Fund (EWJ), which is linked to the MSCI Japan Index. The fund has over $5 billion in assets under management and over 20 million in average daily volume, making it one of the more liquid foreign ETFs available to investors. EWJ contains 327 securities that are diversified among all sectors of the economy. Consumer discretionary makes up nearly 20% of the fund, while industrials comprising another 19% and financials account for 17% of assets.
The two of the top three holdings in EWJ are car manufacturers, Toyota and Honda, which combine to make up just over 7.6% of the total fund holdings. Some of the other top holdings include electronics giants such as Canon and Sony. EWJ is up about 5% this year, already matching gains for all of 2009. For investors who see a turnaround in Japan driven by continued growth in exports to the developing Asian economies, EWJ might be an interesting play (see all the Japan ETFs in our Japan Equities ETFdb Category).
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Disclosure: no positions at time of writing