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Japan ETFs Crumble After Prime Minister's Speech

Eric Dutram

With the arrival of Prime Minister Shinzo Abe and the introduction of enormous stimulus measures, Japanese stocks have taken off, easily putting the country’s market into the top echelon for price growth to start the year. Those days seem like years ago now though, as Japanese stocks have given back double digits in the past two weeks and are now trading at two month lows.

While the beginning of the slide came thanks to weak data in China and fears over bond tapering from the Fed, the latest catalyst appears to be more home grown. This time, Abe released a series of proposals to jumpstart the sluggish Japanese economy, many of which were panned over by investors (read Inside the Crash in Japan ETFs).

Shinzo Abe’s Proposals

According to the WSJ, the Japanese Prime Minister put forward a three pronged approach to push growth higher in the island nation. The program included more monetary easing (doubling bond buying over the next two years), more stimulus ($150 billion in total new spending), and economic reforms (these included stock purchases by the national pension fund, establishment of special economic zones, and industry focused changes as well).

The goal of the program is to raise GDP growth to 2% a year over the next decade, and raise capital spending by 10% in three years. He also wanted to increase R&D investment, lower unemployment, and expand industrial production and exports.

While most expect much of the program to go through thanks to a favorable breakdown in the legislative branch, it appears as though many investors were not sold by the system. Easily one of the main complaints was that the program was too broad, and that no real details were released on any of the aforementioned goals and how to get there (see Asia Ex-Japan ETF Investing 101).

"The initial investor disappointment appears more related to the lack of specific policy measures required to meet the plethora of new economic goals," Lee Hardman, currency analyst for Bank of Tokyo Mitsubishi UFJ said.

ETF Impact

Thanks to this lack of belief in the program and the recent spike in selling pressure for Japanese shares, many investors continued to see big losses in Japan ETFs after the Abe announcement. All of the major funds lost more than 2% on the day, continuing the recent run of weakness in the space.

In fact, over the last ten days, all of the major Japan ETFs have lost more than 10% in the time frame, giving back a big chunk of their gains from earlier in the year.

The losses as of late are even more astounding when investors take a look at a longer term picture. Some funds in the Japan space—and especially those that stripped out currency exposure—were riding extremely high in the beginning of the year, and while they have cratered lately, are still showing impressive gains for longer time periods (read DXJ vs. DBJP: Which is the Better Hedged Japan ETF?).


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Bottom Line

It appears as though investors are starting to waver about Japanese securities, and are looking to take some gains off the table in this market. This has led to a wave of selling that has been as shocking as the buying spree to start the year.

Clearly, some new catalysts will have to take place in order to rekindle demand in the Japanese market, along with some concrete proposals from the government that can truly boost the nation’s economy. Investors do not appear willing to go on faith alone anymore for Japan, and will have to see plans turn into action in order to propel shares back higher (read the Key to International ETF Investing).

If this happens though, and the country can somehow recoup a 2% GDP growth rate, investors could come back to the Japan ETF market in droves. After all, the space is clearly capable of big moves in a short time frame, and once events cool down on both sides of the Pacific, some more stable trading could return to this increasingly in-focus market as well.

However, until then, choppy trading appears to be the name of the game in the Japan ETF market, so be prepared for more volatility in the days and weeks ahead.

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