Investors in the Japanese markets had been hoping that the flip of the calendar to 2010 would bring new hope for the country’s stalled economy, following a bitterly disappointing 2009 that saw Japan lag global economies by a considerable margin. But only two days in to the year, health problems of the finance minister have created yet another obstacle, setting the stage for a potentially devastating reshuffling of roles.
Hirohisa Fujii, the 77-year old politician who oversees economic and financial policy, reportedly submitted his resignation to prime minister Yukio Hatoyama this week after being hospitalized for fatigue last month. It was unclear as to whether Hatoyama had accepted the resignation or was at work convincing Fujii to stay on, as his departure would represent a significant setback for an increasingly unpopular administration. Following a cabinet meeting on Tuesday, Fujii announced that he had undergone a medical checkup and was awaiting recommendations from doctors regarding his ability to continue work.
Japan is at a critical junction, as a broad-based recovery has failed to gain traction and concerns about deflation have roiled the world’s second largest economy. Although the government continues attempts to stimulate the economy through liquidity injections, business leaders recently revealed a pessimistic outlook for the first half of the year. “Unfortunately, the Japanese economy has yet to be on course to sustainable recovery,” said Fujio Mitarai, chairman of Japan Business Federation. “The first half will remain severe as deflation is likely to continue for now.”
Fujii had recently unveiled a plan to earmark one trillion yen in next fiscal year’s budget to creating jobs, supporting local economies, and helping small businesses. The loss of the architect of the current economic agenda would add to the problems facing the nation. “At a time when investors have been edgy about the strong Japanese yen crimping growth, and large government debt issuances possibly reaching unsustainable levels, Mr. Fujii has been the main voice of reassurance for currency and bond markets,” writes Takashi Nakamichi.
Japan ETF Options
As the largest economy outside of the U.S., Japan is a critical component of most well-diversified global ETFs and developed markets funds. For investors looking to either increase to Japan or bet on another downturn, there are a number of ETF options:
- iShares MSCI Japan Small Cap Index Fund (SCJ): This ETF is much less popular than the mega-cap EWJ, but offers more exposure to the local Japanese economy. Whereas SCJ is dominated by multinational firms like Toyota, Canon, and Sony, SCJ invests primarily in Japanese stocks with a market capitalization of less than $1.5 billion. SCJ has more than 500 individual holdings and charges an expense ratio of 0.56%. Other small cap Japan ETFs include JSC and .
- WisdomTree Dreyfus Japanese Yen Fund (JYF): A topic of much debate both in Japan and around the world has been the strength of the yen and its impact on a sustainable recovery. Despite record low interest rates, the yen gained ground against the dollar for much of 2009, damaging Japan’s export market. If Japan is headed for a financial crisis, however, the yen could find itself on uneven ground next year. Other Japanese yen ETFs include FXY and JYN.
- ProShares UltraShort MSCI Japan (EWV): For investors who think that Japan’s economy will continue to struggle in 2010, EWV offers a way to double down in a short positions. There are a couple things to note about EWV though: 1) it strives to deliver daily leverage, meaning that an investment requires regular monitoring, and 2) the MSCI index to which this ETF is linked is composed of many mega-cap companies that maintain global operations and aren’t necessarily dependent on the local economy for all of their revenues.
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Disclosure: No positions at time of writing.