After logging in the biggest weekly drop of 11% in more than seven years on a rising yen, fears of a global slowdown and the sell-off in banks, the Japanese stocks bounced back strongly at the start of this week. Notably, the Nikkei 225 index jumped 7.2% in Monday's trading session, representing the biggest daily gain since September, and extended gains of nearly 0.2% in today's trading session.
With this gain, the index has reversed the bearish trend it saw last week. Impressive two-day gains came on the back of bargain hunting and hopes for further stimulus from the central banks in Europe and Japan. In particular, renewed contraction in the Japanese economy brought back the need for more easing measures to stimulate the economy.
Additionally, the yen has weakened from the highest level of ¥110.98 reached last week against the greenback that will benefit exporters and the manufacturing industry. This is because Japan is primarily an export-oriented economy, and a weaker currency makes its exports more competitive.
More Stimulus in the Cards
The economy contracted 1.4% year over year in the final quarter of 2016, worse than the Wall Street expectation of a 1.2% contraction. A drop in consumer spending, weak exports and lower private consumption continued to weigh on the growth of the world's third-largest economy. The persistent slump in Japan's biggest trading partner - China - added to the woes.
The slowdown is the major setback for Prime Minister Shinzo Abe and his reform policy, Abenomics, which is aimed at pulling the country out of deflationary pressure and putting it back on the growth trajectory. Sluggish growth has raised speculation over additional fiscal stimulus by the central bank.
Earlier this month, Bank of Japan (BoJ) adopted measures similar to the European Central Bank (ECB) by pushing interest rates to the negative territory. Additionally, the central bank maintained its bond buying program of 80 trillion yen ($675 billion) per year and invested in exchange-traded funds and real estate investment trusts. Now, an analyst at J.P. Morgan expects BoJ to cut interest rates further to minus 0.5% from the current minus 0.1% anytime soon, plus increase its Japanese government-bond purchases.
Further, many economists expect Japanese growth to rebound in the coming months. As per the survey by the Japan Center for Economic Research, 38 analysts project that the economy would expand by an average of 1.4% in the first quarter, which would mark the best growth in five quarters.
Given this, Japanese ETFs are poised for a rebound, especially in the session right after the Presidents' Day holiday in the U.S. As a result, investors could tap the current opportune moment by investing in Japan ETFs.
ETFs in Focus
Currently, there are several Japanese equity ETFs trading on the U.S. market. While there are a handful that are relatively specialized, either tracking small-cap benchmarks or dividend-focused indexes, the most encouraging funds right now are the ones that are not confined to one segment, but provide exposure to the broad Japanese equity market. Below, we have highlighted some of them that could fetch substantial returns in the coming days on the expectation of additional stimulus.
Of these, the ultra-popular fund is the iShares MSCI Japan ETF (NYSEARCA:EWJ), with a total asset base of $17.7 billion. This fund tracks the MSCI Japan Index and holds 318 stocks in its basket. Though it is slightly skewed toward the top firm - Toyota Motor (NYSE:TM) - at 5.8%, other firms do not account for more than 2.12% of assets. It trades in heavy volume of 50.3 million shares per day and charges 47 bps in annual fees.
Another fund that provides a similar broad exposure to the Japanese stock market is the Precidian MAXIS Nikkei 225 Index ETF (NYSEARCA:NKY). This fund does not have the same level of AUM or volume as EWJ, having nearly $41.6 million in assets and exchanging 40,000 shares a day. But it follows a much more widely known index - the Nikkei 225. Here, Fast Retailing (OTCPK:FRCOF, OTCPK:FRCOY) makes the top firm with 8.4% share, while other securities hold less than 4.3% share in the portfolio. The ETF has a slightly higher annual fee of 50 bps.
Investors should note that both EWJ and NKY are large-cap centric funds with minor allocations to mid and small caps, and having consumer discretionary and industrials as the top two sectors. The products also have a Zacks Rank of 3 or "Hold" rating.
Apart from these, Japan hedged funds - the WisdomTree Japan Hedged Equity ETF (NYSEARCA:DXJ), the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEARCA:DBJP) and the iShares Currency Hedged MSCI Japan ETF (NYSEARCA:HEWJ) - seem excellent picks. These ETFs offer exposure to the broad Japanese stock market, while at the same time provide a hedge against any fall in the Japanese yen. The trio has a Zacks ETF Rank of 2 or "Buy" rating, suggesting that they will outperform the markets in the coming months.
Risk-aggressive investors seeking to make big profits from the bullish sentiments in a very short period could go long on either of the three leveraged products, namely the ProShares Ultra MSCI Japan ETF (NYSEARCA:EZJ), the Direxion Daily MSCI Japan Currency Hedged Bull 2x Shares ETF (NYSEARCA:HEGJ) and the Direxion Daily Japan Bull 3X Shares ETF (NYSEARCA:JPNL) - available in the space. EZJ provides two times (2x, or 200%) leveraged exposure to the daily performance of the MSCI Japan Index, while JPNL creates a triple (3x, or 300%) leveraged long position in the same index. Meanwhile, HEGJ seeks two times leveraged exposure to the MSCI Japan US Dollar Hedged Index.