How Sustainable Is The Nikkei Rebound? Japan ETFs In Focus

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Includes: DBJP, DXJ, EWJ, NKY
by: Zacks Funds

Japan's key index, the Nikkei, ended in the positive territory for the first time this year on Wednesday. The Nikkei gained 2.9%, or 496.67 points, on Wednesday, after losing nearly 1,800 points from the start of this year through Tuesday. Despite hitting the highest year-end close last year in 18 years, the benchmark was struggling to finish in the green from the start of this year following China-led global growth worries and the oil price slump.

Reasons Behind the Rebound

Better-than-expected trade data out of China, gains in the U.S. markets and decline in the yen's value against major currencies emerged as the main reasons behind the rebound. The General Administration of Customs reported that Chinese exports declined 1.4% in December, narrower than a 6.8% drop in November and the markets' estimate of an 8% decline. Though imports declined for the 14th consecutive month in December, the 7.6% drop in imports compared favorably with November's plunge of 8.7% and the markets' forecast of an 11.5% decline.

Meanwhile, modest gains in the U.S. markets on Tuesday also boosted the Nikkei. A late rebound in Healthcare and Technology stocks helped the benchmarks to offset a further decline in oil prices. Also, the weaker yen helped the major exporters, including large-cap auto companies and tech companies, to attract investors, as it raised the possibility of an increase in export volumes.

Will It Sustain?

The sustainability of this rebound in the near term will largely depend on some key factors, including the condition of the Chinese economy, the movement of crude and the health of the Japanese economy. Though better-than-expected Chinese trade data boosted the markets on Wednesday, the decline in both exports and imports indicate that both global and domestic demand continued to remain weak. Meanwhile, the World Bank recently reduced its outlook for Chinese GDP growth in 2016 by 30 percentage points to 6.7%, below last year's estimated growth rate of 6.9%. The bank also predicted that the economy may grow at a slower pace of 6.5% over the next two years.

Separately, given the weak outlook for the Chinese economy, which is one of the leading importers of oil, and an already oversupplied market, there is little hope of a recovery in oil prices. Crude is currently trading at a 12-year low, with every indication of a slide below $30 per barrel.

In this scenario, the Japanese economic environment will play a key role in setting the course of the Nikkei in the coming months. Japan opted for several economic stimulus measures last year, which proved to be more effective than the steps taken by China and the eurozone. The economy rebounded strongly in the third quarter to register a GDP growth rate of 1%, as against the second quarter's contraction of 0.5%.

Meanwhile, the impact of recent modifications in the quantitative easing program by the Bank of Japan (BOJ) will also remain in focus. The bank opted for raising the Japanese government bonds' (JGBs) average maturity from 7-10 years to 7-12 years, and announced that it will allocate 300 billion yen of assets annually in purchasing ETFs that seek to follow the JPX-Nikkei Index 400.

Japan ETFs in Focus

In this scenario, popular Japan ETFs and funds that closely track the performance of the Nikkei will remain on investors' radar in the coming months. The Precidian MAXIS Nikkei 225 Index ETF (NYSEARCA:NKY), which tracks the performance of the Nikkei 225 Index, returned nearly 9.4% last year. Meanwhile, the performance of other popular Japan ETFs will also remain in focus in the near term. In 2015, the iShares MSCI Japan ETF (NYSEARCA:EWJ), the WisdomTree Japan Hedged Equity ETF (NYSEARCA:DXJ) and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEARCA:DBJP) returned 8.9%, 3.3% and 4.5%, respectively.

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