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5 Reasons to Buy Japan ETFs

Sanghamitra Saha

Since Japan’s bubble busted at the start of the 1990s, the country’s stocks have registered five major rallies. The region’s shares have been gaining in recent times too. iShares MSCI Japan ETF EWJ added about 2.5% in the last one month and more than 0.7% in the last 10 days (as of Nov 13, 2017).

But still investors do not adequately hold Japanese stocks, as per a source. Agreed, there are reports that purchase of Japanese equities via ETFs is more than 1 trillion yen this year. Still, we highlight below a few reasons why investors can consider more Japan stocks and ETFs.

Solid Corporate Earnings

Corporate earnings are coming up favorable. Nikkei spurted to a 26-year high on strong corporate earnings last week. Foreign investors eyed "purchases of mainstay issues" thanks to a slew of upbeat earnings releases. A source said, “Sony, in particular, stands as a symbol of Japan Inc. on the rebound.” The company’s operating profit is on track to hit a record in fiscal 2017 for the first time in 20 years. Oil companies showed buoyancy on a recovery in the underlying commodity.

“April-September pretax profit at roughly two-thirds of Japan's top 200 companies that have already announced earnings for that half beat forecasts by 13% in the aggregate, according to Daiwa Securities,” as quoted on asia.nikkei.com.

There were positive revisions by a number of Japanese firms in their earnings estimates for the business year through next March. If the upward revisions continue, the Nikkei Stock Average could surge to 24,000, as per Daiwa Securities Group.

Accommodative Central bank

The Bank of Japan cut its benchmark borrowing rate to the negative territory in January 2016 and is pursuing its bond-buying program at a pace of 80 trillion yen a year. Still, a new board member of the central bank is in favor of more stimulus. The landslide victory of prime minister Shinzo Abe in a snap election in late October also calls for the continuation of “Abenomics,” which focuses on three factors — extreme monetary easing, flexible fiscal policy and structural reforms (read: Japan ETFs in Focus as Shinzo Abe Wins).

Wealth Effect

An improving and accommodative economy coupled with a surging stock market will continue to add wealth effect, resulting in rising consumer confidence. Already, "department store sales have begun to rise due to this wealth effect," as per Nomura Securities. Higher consumer expenditure will further boost Japanese stocks.

Tax Cut Hopes in the U.S.

Though there is a lot of confusion over a seamless passing of the tax reform in the United States right now, the greenback should gain strength on chances of tax cuts and the Fed’s policy tightening. If this happens, the yen will lose strength against the greenback and fuel Japanese shares. Meanwhile, oil prices shored up on hopes of supply reduction (read: Top ETF Stories of October 2017).

If global markets remain relatively steady on rising oil prices and strengthening of economies, yen may not gain strength on safe-haven demand. This will be a boon to Japan investing. The impact of yen is huge as export-oriented and leading automobile companies of Japan bear the brunt of a stronger yen.

At the current level, the yen-dollar relationship is pretty stable. PowerShares DB US Dollar Bullish ETF UUP was up 1.3% in the last one month (as of Nov 13, 2017) while CurrencyShares Japanese Yen ETF FXY was down about 1.1% (read: December Rate Hike May Boost These ETFs).

Hopes of Higher Economic Growth

The International Monetary Fund upgraded its forecast for Japan’s growth rate to 1.5% for 2017 compared with its July forecast of 1.3% expansion as exports gain momentum. Notably, Japan has maintained six quarters of growth in a row, the longest stretch of economic expansion since 2006.

ETFs to play

Below we highlight a few ETFs that have gained considerably in the last one-month period (as of Nov 13, 2017).

iShares Adaptive Currency Hedged MSCI Japan ETF DEWJ

iShares Currency Hedged JPX-Nikkei 400 ETF HJPX

PowerShares Japan Currency Hedged Low Volatility Portfolio FXJP

WisdomTree Japan Hedged Capital Goods Fund DXJC

WisdomTree Japan Hedged Dividend Growth Fund JHDG

First Trust Japan AlphaDEX Fund FJP