The Japanese economy, along with related exchange traded funds (ETFs), are heavily dependent on the health foreign economies. A new dominant political party, however, plans to look inward to accomplish the country’s economic goals.

The Democratic Party of Japan (DPJ) plans to support small- and medium-sized businesses, a major shift from the former Liberal Democratic Party’s inclination toward big businesses, comments Patricia Oay for Morningstar. In addition, Prime Minster Yukio Hatoyama is proposing stronger trade relations with neighboring Asian countries, which would further benefit Japanese businesses.

Potential investors seeking some allocation in Japan may consider broad market ETFs or small-cap ETFs, depending on where your interests happen to be.

• iShares S&P/TOPIX 150 Index (NYSEArca: ITF): up 0.2% year-to-date

• iShares MSCI Japan Index (NYSEArca: EWJ): up 1.2% year-to-date

• iShares MSCI Japan Small Cap Index (NYSEArca: SCJ): up 6.1% year-to-date

• WisdomTree Japan SmallCap Dividend (NYSEArca: DFJ): up 5% year-to-date

• SPDR Russell/Nomura Small Cap Japan (NYSEArca: JSC): up 7.5% year-to-date

Note that consumer discretionary sector accounts for around 20% weightings in broad market and small-cap Japan ETFs. The broad market portfolio includes global auto manufacturers and consumer electronic firms, whereas the small-cap portfolios contain domestic-oriented restaurants, retailers and apparel manufacturers. Industrials, materials and information technology are export-oriented. The small-cap ETFs available have similar weightings except SCJ may be more exposed to financials.

Before the economic recovery can freely come about, the DPJ has to deal with a complex bureaucracy and large budget deficit. Another potential problem is the appreciating Japanese yen against the U.S. dollar. A higher yen may be better for local businesses, but it also means more costly exports. The biggest concern is the country’s rapidly aging population.

For more information on Japan, visit our Japan category.

Max Chen contributed to this article.

Tags: Asia, DFJ, EWJ, Global ETFs, ITF, Japan, JSC, SCJ, Small-Cap