Which Way are Japan Market & ETFs Headed?

Which way will Japan exchange-traded funds such as the iShares MSCI Japan (EWJ) go as negative economic news fights what is perceived as very attractive valuations?

Japanese bankruptcies rose to a 4-year high in 2007 as record oil prices and a regulation-induced housing slump slashed profits according to report from barchart. In addition, corporate bankruptcies climbed for a second straight year, rising 6.4% as liabilities surged 4.1% to 5.7 trillion yen ($53.1 billion), the first increase in seven years. Insolvencies in the construction sector rose to a 4-year high after stricter building permit rules caused housing starts to fall to a four-decade low. It is the 1st time since Japan emerged from a recession in 2002 that overall insolvencies gained for back-to-back years.

But despite this bad news, Japanese stocks and ETFs rebounded from a 26-month low as investors snapped up shares of exporters such as Honda, after the yen weakened against the dollar, and as real estate companies clawed back significant losses. The yen recently traded at 107.87 to the dollar, after breaking into 105 territory on Wednesday to reach a 2½-year high acording to the Financial Times.

The Nikkei jumped 2.1 per cent to close at 13,783.45, while the broader Topix rose 2.2 per cent to 1,330.44. Honda, a holding of the Chartwell Global 30, jumped 3.9 per cent to Y3,220, having fallen 11 per cent in value until Wednesday. Toyota gained 3.1 per cent to Y5,470. Sony rose 2.7 per cent to Y5,660.

Real estate stocks gained ground after a UBS report that said shares prices of Japanese real estate companies could “bounce back sharply” with the easing of subprime woes. The Topix real estate index surged 5.7 per cent, while Mitsubishi Estate jumped 7 per cent to Y2,450.

The weakness in the Japanese yen may be short-lived as the unwinding of the carry trade should push yen upward. Valuations on the Japan's market second section, which represents small Japanese companies, appears to be trading collectively at below book value.