Not Too Late to Invest in Japan (EWJ)

Includes: EWJ, JEQ, JOF, JPXN, VPL
by: Steven Towns

For those who are considering investing in Japan it's important to understand that while it's not too late to do so, your holding period in order to realize strong gains and/or to recover from any short term corrections given the Nikkei's high volatility is necessarily longer than it would be had you invested earlier on or during one of the three potential buying points earlier this year.

Nonetheless, the good news is there will be more investors in Japanese stocks and funds, both in the U.S. and in Japan. The Wall Street Journal Weekend Edition (print: Mar. 25-26, B4) mentions a few new forthcoming ETFs that may or may not be of interest depending on liquidity and fees. It also lists a number of mutual funds in addition to the popular iShares MSCI Japan Index (ETF) [ticker: EWJ]. See below for a list. I personally invest in T. Rowe Price's Japan fund (MUTF:PRJPX). In Japan, mutual funds are becoming an increasingly popular investment method. There is strong demand for new funds and the most enthusiasm is for high dividend yielding stock funds.

For traders, EWJ is your best bet given its liquidity and the surprising volatility of its nearly 280 holdings. Also, as the WSJ pointed out, one thing anyone investing in Japan (and anywhere overseas) needs to remember is the effect currency conversion can have on one's returns. The Yen/USD has been quite volatile itself and the unofficial consensus is that the yen will strengthen against the dollar, especially from the second half of '06. My general rule of thumb is to add to my position whenever the Nikkei and TOPIX trade lower and when the yen weakens against the dollar.

I will keep you up-to-date whenever new Japan ETFs are launched. In the meanwhile, strongly consider large cap stocks and funds and be cautious of smaller caps. Quarter-ending March 31st earnings releases will start towards the end of April and it's expected Japanese blue chips will announce another solid performance. FOREX profits with the yen still relatively weak will also be a boost, particularly for big exporter stocks such as in autos and consumer electronics. Don't forget all the buying that will be taking place as investors on both sides of the Pacific continue to embrace a recovering Japan.

Funds mentioned in WSJ article:

    • Fidelity Japan (MUTF:FJPNX)
    • T. Rowe Price Japan (PRJPX)
    • JP Morgan Japan (CVJAX)
    • iShares S&P/Topix 150 Index Fund (ITF)
    • iShares MSCI Japan Index Fund (NYSEARCA:EWJ)


    • Russell/Nomura Prime Index (Spring '06)
    • Dow Jones Asia/Pacific Select Dividend 30 Index ETF (Spring/Summer '06)
    • Dow Jones [Japan-specific dividend index] (unknown)

EWJ 1-yr chart: