Is Abenomics 2.0 Boosting Japan Mutual Funds?
In late September, Japanese Prime Minister Shinzo Abe had announced the second stage of his popular Abenomics plan. The “stage two” plan is aimed to resuscitate the Japanese economy. Among other things, the goal is to boost Japan’s gross domestic product by a significant 20% to $5 trillion by 2020.
Following this, Japan Stock mutual funds have gained relatively well. In October, the sector gained 7.9% and in November Japan Stock funds added 1.3%, which helped it to finish among the top gainers for the month. Morningstar data also shows that Japan Stock funds are leading one-month gains currently.
Abe unveiled a new set of economic initiatives, which he dubbed as “Abenomics 2.0.” He promised to take Japan into a new era of prosperity. His proposals have, however, been met with both bouquets and brickbats. Some economists and market watchers have questioned the viability of the proposals. For instance, executives from leading business lobby termed Abe’s numerical targets as “outrageous” and “impossible.”
During the first phase of Abenomics, Japan’s benchmark, Nikkei 225, had shown a significant uptrend. Though it is too early to predict whether the new targets are already having a positive impact, Nikkei 225 has gained 4.5% since Sep 29.
The focus once again shifts to Japan mutual funds, which were topping the charts earlier this year before stumbling in the third quarter. Japan’s economic situation is not as fragile as is widely believed. So, it’s not a bad idea to pick Japan mutual funds which are poised to benefit under existing conditions and will gain further as the economy continues to gather steam.
Abenomics 2.0: The Three Arrows
Abe outlined several new policy measures late last month, which he calls “Abenomics 2.0.” Abe spoke of new targets or his new “three arrows": achieving a higher GDP over the next five years, providing support for child care and better social security. The last two are aimed at improving child rearing and care for the elderly for economically distressed families.
Abe also aims to boost social security by offering care to the nearly 150,000 people who are slated to enter nursing homes. He also said that he would increase employment opportunities for the retired. Several prominent newspapers and economists have questioned where Abe will find the resources to fuel the last two initiatives.
Has There Been a Positive Trend?
Market watchers and economists have also pointed to the fact that several of Abe’s initial targets are still unfulfilled. Others question the efficacy of the first phase of Abenomics and have argued that only the monetary policy has proven to be effective. However, an assessment of the state of Japan’s economy by the Financial Times tells us a different story.
The study has praised Abenomics’ record on improving corporate governance standards. The objective of these changes has been to increase return on equity and raise the number of independent directors. The ability to push through reforms in the agricultural sector has also been praised.
Japan’s unemployment rate of 3.3% is much lower than several developed economies. Real monthly wages recorded their first yearly increase in July in more than two years. Additionally, the average wage increase for fiscal 2015 is 2.2%, the highest level achieved in 17 years.
Japan Mutual Funds
Japan Stock fund category had emerged as the best gainer in the first half of 2015. The market rout since then has dragged down major categories. However, Japan funds were less affected than its neighboring regions. Japan funds are up nearly 14% year to date, according to Morningstar. This is the best year-to-date gain so far among all fund categories.
Banking on the optimism, investors interested in investing in Japan region may bet on the following three mutual funds. These funds carry either a carry a favorable Zacks Mutual Fund Ranks. The following funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance.
The minimum initial investment is within $5000. These funds are in the green over year-to-date and 1-year periods. The 3- and 5-year annualized returns are also favorable.
Fidelity Japan Smaller Companies (FJSCX) seeks capital appreciation over the long term. It invests most of its assets in Japanese securities or other instruments economically connected with Japan. FJSCX invests in securities of companies with market cap similar to those listed in Russell/Nomura Mid-Small Cap Index or the Japanese Association of Securities Dealers Automated Quotations (JASDAQ) Index.
Fidelity Japan Smaller Companies currently carries a Zacks Mutual Fund Rank #1. FJSCX has gained 13.7% and 13.5% over year-to-date and one-year periods, respectively. The 3- and 5-year annualized returns are respectively 18.7% and 12%. Annual expense ratio of 1% is lower than the category average of 1.43%.
T. Rowe Price Japan (PRJPX) invests a lion’s share of its assets in companies located in Japan. The fund invests in companies of all sizes and across Japanese industries. Managers use bottom-up stock selection process, while also being aware of industry outlooks.
T. Rowe Price Japan currently carries a Zacks Mutual Fund Rank #1. PRJPX has gained 16% and 11.7% over year-to-date and one-year periods, respectively. The 3- and 5-year annualized returns are respectively 12.7% and 7.8%. Annual expense ratio of 1.05% is lower than the category average of 1.43%.
Rydex Japan 2x Strategy Fund Class A (RYJSX) seeks to give returns that correspond to two times the performance of the fair value of the Nikkei 225 Stock Average. RYJSX invests in common stocks having market capital within the range of those listed in the index. RYJSX invests a lion’s share of its assets in securities that have the potential to return two times the performance of the underlying index.
Rydex Japan 2x Strategy Fund Class A currently carries a Zacks Mutual Fund Rank #2. RYJSX has gained 20.3% and 11.8% over year-to-date and one-year periods, respectively. The 3- and 5-year annualized returns are respectively 20% and 6.8%. Annual expense ratio of 1.54% is lower than the category average of 2.03%.
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