Why Japan Is Leading the Small-Cap ETF Rally

June 17, 2009 at 12:00 pm by Tom Lydon

images55 The outlook for Japan’s economy is not as doom and gloom as once anticipated, with an upgrade to exports and industrial production giving hope to the overall economic picture. Related stocks and exchange traded funds (ETFs) are on the move in response to the news.

The Japanese government upgraded its overall economic assessment for the second consecutive month on more positive news from two key sectors.

Both exports and industrial production, two engines that will help the economy get back on track, are finally on the mend. There are still outside factors that Japan cannot control, but the upgraded situation of the economy is enough to begin the upward climb, reports The Economic Times.

Takashi Mochizuki for The Wall Street Journal reports that the government’s report adds to a slew of data and analytical reports that are predicting that Japan’s economy has likely hit bottom after going through its worst recession since World War II.

The beginning of the good news has led to a small-cap rally, as the value aspect of these companies has led to better performance. Small-caps companies have more room for growth than their more established large- and mega-cap counterparts. Small-cap also companies tend to adapt to the shifting market conditions with greater ease than the much larger companies.

Will Japan remain strong, though? There are lessons to be learned from the crisis for years down the road. Forex Traders on Seeking Alpha notes that while Japan has been working hard to heal its shortcomings (some of which include nepotism, factionalism and cronyism within its political system), there are still other problems to contend with. Those include a huge public deficit, an aging population and heavy competition with China in the export sector.