Five ETFs To Cash In On Japan’s Rise

By Aaron Levitt | May 15, 2013 AAA

Japan has been viewed by many investors, as one of the most unfavorable markets for at least 20 years. Ever since the 1980's crash and resulting crippling deflation, stocks in the nation remained stuck in neutral and Japan's economic condition deteriorated. However, the situation in the former Asian superstar could be changing for the better.

The election of Shinzo Abe as Japan’s prime minister via a landslide victory changed everything. Abe unveiled a dynamic new strategy to get the Asian nation back on track. Dubbed “Abenomics”, the prime minister announced a $103 billion stimulus package as well as targeted a 2% annual inflation rate. As such, the yen fell and Japan’s stock market took off.
For investors, Abe’s policies could be final push to move Japan back into the forefront of portfolios.

All About The Strong Yen

For the better half of twenty years, Japanese equities have been "dead money." After a huge boom and bust cycle resulting from a real estate crash, the country has just plodded along. However, Abe’s recent policies are changing that.

SEE: The Japanese Yen – What Every Forex Trader Needs To Know

Much of Japan’s continued issues stem from its currency- the Yen. Seen as a reserve currency, the Yen has continued to act as a safe haven during the economic crisis. A strong currency is a major issue if your economy is based on exports like Japan’s. However, there may be signs that the yen's strength is ebbing due to Abenomics.

Since the beginning of October to mid-May, the yen- as measured by the CurrencyShares Japanese Yen Trust (ARCA:FXY) -has dropped from around 126 to 96. That’s a decline of nearly 24%. Much of the drop- around 14%- this year after Abe was elected. That's huge considering Japan's dominance across a variety of high tech sectors.

Many Japanese multinationals -like Sharp (OTCBB:SHCAY) and Canon (NYSE:CAJ) -are dependent on exports for their lively hood. As such, any drop in the year will make these value-added high-tech goods more desirable and boost revenues at Japanese producers. Already, the nation is seeing big demand across the rest of emerging Asia for its renewable energy applications, infrastructure and pollution remediation equipment.

The falling yen along with Abe’s other measures have caused the Japanese stock market to swoon. The nation’s Nikkei 225 stock index has risen by 50%, while other Japanese stock measurements like the Topix Index saw gains of 61% since Abe hit the campaign trail in November. These huge gains could signal that Japan is finally back with a vengeance.

SEE: How Does The Yen Affect American Finance?

Betting On Japan’s Rise

Despite the huge gains already, Japanese stocks could be in for more as the nation’s exporting economy finally begins to spread its wings. That means longer term investors can still cash in on Japan’s future. And the best way to do that is through exchange traded funds (ETFs).

One of the best could be the $9 billion WisdomTree Japan Hedged Equity (ARCA:DXJ). The basic idea is simple- a depreciating yen will diminish the performance of Japanese equities once converted back into U.S. dollars. The DXJ uses hedging to essentially take the yen out of the equation, so investors just got the stock returns. That provides “pure” exposure to Japans leaders like Mitsubishi UFJ Financial (NYSE:MTU) and Takeda Pharmaceuticals (OTCBB:TKPYY). The fund charges just 0.48%in expenses and yields 1.5%. Likewise, investors can use the db X-trackers MSCI Japan Hedged Equities ETF (ARCA:DBJP) for hedged Japanese exposure.

While the iShares MSCI Japan Index (ARCA:EWJ) has become the most popular way to play Japan, the smaller SPDR Russell/Nomura PRIME Japan (ARCA:JPP) may be a better bet. Of the funds 388 holdings more than half lie within the industrials, consumer discretionary and technology sectors. That makes it a prime play on the recovery in Japanese exports. Expenses run 0.50%.

Finally, any boosts to the exporting economy by Abe’s policies will ultimately trickle down to the domestic one. That means it could be time for small-cap exposure in Japan. Both the iShares MSCI Japan Small Cap Index (ARCA:SCJ) and WisdomTree Japan SmallCap Dividend ETF (ARCA:DFJ) offer exposure to Japan's domestic economy. The iShares fund offers a broad take on the theme, while the WisdomTree fund hones in on high dividend payers in the region.

SEE: The U.S. Dollar and The Yen – An Interesting Partnership

The Bottom Line

Japan has been considered “dead money” for a long time. However, with the election of Shinzo Abe and birth of “Abenomics”, things are looking up for exporting dependent nation. For investors, Japan may finally be awaking from its doldrums. The previous picks along with the MAXIS Nikkei 225 Index ETF (ARCA:NKY) –make ideal selections in playing the nation’s rebirth.

At the time of writing, Aaron Levitt did not own shares in any of the companies or funds mentioned in this article.

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