Despite the high profile struggles for two of Japan’s largest and best-known companies–Toyota’s massive recall and Japan Airlines’ bankruptcy–signs of a long-awaited recovery are finally beginning to emerge in the world’s second largest economy. Japan’s economy unexpectedly grew at an annualized rate of 4.6% in the fourth quarter of 2009, crushing analyst estimates of a 3.5% expansion.
The upside surprise was largely due to increases in export activity, particularly from a surging China, although consumer spending also rose for the third consecutive quarter. Government incentives encouraging the purchase of cars and electronics are responsible for much of the recovery in the consumer sector. Despite the encouraging signs, Japan certainly isn’t out of the woods yet. With a mountain of debt–currently approaching a mind-boggling 200% of GDP–the government will likely be unable to extend stimulus plans that have boosted consumer spending. Expectations for coming quarters are relatively tame: economists anticipate that real GDP growth will slow to 0.8% for January to March and 0.75% for the following quarter.
But for the time being at least, Japan is no longer the primary drag on the global economy. With the U.S. and China posting impressive growth rates in the final quarter of last year (5.7% and 10.7%, respectively), Europe, which grew by just 0.4%, is the new laggard. Japan’s growth was sufficient to keep it just ahead of China as the world’s second largest economy, but that title seems certain to change hands at some point in 2010.
Japan ETFs In Focus
In addition to funds dominated by mega cap companies, there are several ETFs that invest primarily in small cap companies, providing more pure play exposure to the local Japanese economy. While mega-cap ETFs like These funds should get a boost on Tuesday following the better-than-expected GDP figures, and could continue to rally if the Japanese economy is able to pull itself up from a prolonged downturn.
- iShares S&P/TOPIX 150 Index Fund (ITF): This ETF is tilted towards mega caps, with Toyota, Mitsubishi, Honda, and Canon all included in the top five holdings. The index underlying ITF is comprised of approximately 70% of the market value of the Japanese equity market, and includes 150 highly liquid securities selected from each major sector of the Tokyo market. ITF has added about 23% over the last year, despite a recent pullback.
- SPDR Russell/Nomura Small Cap Japan ETF (JSC): This ETF consists of nearly 400 small cap Japanese stocks spread across all sectors of the economy, and has a weighted average market capitalization of just $875 million. JSC trades at a forward price-to-earnings multiple of about 16 times. By comparison, the large cap-heavy SPDR Russell/Nomura PRIME Japan ETF (JPP) has a forward multiple of nearly 21 times.
- iShares MSCI Japan Small Cap Index Fund (SCJ): This ETF is an alternative option for investors looking to achieve small cap exposure to Japanese equity markets. The top holdings of SCJ–Fujikura, Sotetsu, and Ebara–likely aren’t recognized by more international investors, but they may offer better exposure to the local Japanese economy than Honda, Toyota, and Canon. SCJ has almost 600 holdings and charges an expense ratio of 0.56%.
Disclosure: No positions at time of writing.