More Reasons to Consider Buying Japan (EWJ, ITF, JOF)

Includes: EWJ, JOF, JPXN
by: Steven Towns

Bloomberg reports that UBS AG's Tokyo brokerage unit has raised its target for the TOPIX Index by 11% from 1,800 to 2,000. The TOPIX closed Thursday in Japan up by .05% at 1,743.77. Chief equity strategist Shoji Hirakawa noted the following pluses and said the TOPIX may reach 2,400 next fiscal year (ending March '08).

• Strong earnings results at Japanese companies
• Positive outlook for economic growth
• Inflow of corporate and household pension funds into the stock market

Approximately 1,600 firms make up the 1st section of the TOPIX Index, the one referenced above, compared to the 225 of the Nikkei 225 Stock Average. The 2nd section features over 500 companies with smaller capitalizations than those in the 1st. There are many sub indices or sections based on the TOPIX, such as the core-30, similar to the Dow, and also for American investors there is the iShares S&P/TOPIX 150 Index ETF (ITF). I am not a big fan of ITF even though its expense fees come in .09% under iShares MSCI Japan Index ETF (NYSEARCA:EWJ), because it has a 3-month average trading volume less than 50,000 and it is a $120+ per share, which naturally creates some wide bid-ask spreads.

That being said, I remain bullish on Japan overall, including both the TOPIX 1st section and the Nikkei 225 Stock Average. ITF may not be the best way to go for the above mentioned reasons but honestly speaking you won't miss out on the UBS analyst's forecast rise in the TOPIX if you go with EWJ because it has about twice the holdings of ITF, a majority of which are components of the TOPIX.

I must say here that I have been and continue to be rather bearish on smaller cap stocks (such as the Japan Smaller Capitalization Fund (NYSE:JOF)) since I see their strong rise taking a back seat as the economy continues to recover and larger caps continue to increase in profitability, not to mention the valuation issues.

Click here for a link to the Bloomberg article.

1-yr stock chart comparison of ITF, EWJ, and JOF