Japan ETFs In Focus After Shocking Resignation

by on June 2, 2010 | ETFs Mentioned:

Yukio Hatoyama resigned suddenly on Wednesday after just eight months in office, setting off a round of jostling among rival politicians to become Japan’s fifth prime minister in less than four years. Hatoyama had seen his popularity slide steadily since his election, highlighted by a controversial backtracking on a promise to move a U.S. marine base off Okinawa. Hatoyama called the decision to retain the base “heartbreaking,” but critics were quick to accuse him of giving into U.S. pressure, and his government coalition began to suddenly dissolve.

The rapid turnover of prime ministers has undermined Japan’s recovery efforts, helping to extend a nearly two decade long economic slide. Since 1989, only Junichiro Koizumi served more than 1,000 days in the office, with several leaders stepping aside after less than one full year. Whoever steps in to the position next will face some daunting challenges, including mounting debt burdens, a stubbornly strong currency, and an ongoing battle against deflation.

One of the first to throw his name into the ring was finance minister Naoto Kan, who became famous in the mid-1990s when he exposed the government bureaucracy’s responsibility for infecting hemophiliacs with HIV-tainted blood. Some analysts see Kan as the early favorite to replace the outgoing Hatoyama, although a handful of additional candidates are expected to officially enter the race in coming days.

Japan ETFs In Focus

Although Hatoyama’s resignation was unexpected, Japanese equity markets gave little reaction, perhaps reflecting expectations that his successor will struggle to dramatically change economic policies or implement reforms. As finance minister and deputy prime minister, Kan has had a hand in the crafting of current policies, suggesting that little would change were he to become the next prime minister.

Although the military base issue sealed Hatoyama’s fate, plans for reshaping a struggling Japanese economy are expected to be a central topic in upcoming elections. Kan recently stated that Greece’s perilous fiscal predicament has served as a “wake-up call” to him, bringing a sense of urgency to the issue of reducing Japan’s soaring national debt. As a percentage of GDP, Japan’s debt is expected to top 250% by 2015, making its burden among the largest in the world (see Three Country ETFs With Low Debt-To-GDP).

Below, we highlight three ETFs that could be in focus as elections near (see all ETFs in the Japan Equities ETFdb Category)

  • iShares MSCI Japan Small Cap Index Fund (SCJ): This ETF tracks the MSCI Japan Small Cap Index, a benchmark that steers clear of many well-known Japanese stocks to include 40% of the eligible small cap universe within each industry group. Because small cap stocks tend to rely more heavily on growth in domestic spending, ETFs focusing on this corner of the market are often seen as a better “pure play” on the local economy (see Guide To Small Cap International ETFs).

  • PowerShares FTSE RAFI Japan (PJO): This ETF is part of the PowerShares line of RAFI ETFs, funds that use an alternative to capitalization-weighting designed to “reflect each company’s current economic footprint” (see Does Your Portfolio Need A RAFI ETF?). PJO currently has about 120 holdings, with consumer goods accounting for nearly one third of holdings.

  • WisdomTree Japan Hedged Equity Fund (DXJ): This ETF also offers unique exposure to Japanese equities. While most international ETFs don’t hedge out currency exposure, the index underlying DXJ seeks to measure the performance of Japanese equity securities that “is attributable solely to stock prices without the effect of currency fluctuations.” Maintaining a weak yen will likely be a primary goal of Japan’s next prime minister, making DXJ an interesting option.

Disclosure: No positions at time of writing.