Japan ETFs: The New War They're Waging | ETF Trends

Japan’s economy and exchange traded funds (ETFs) have a new battle to fight: deflation. In fact, for the first time since 2006, the country’s Cabinet Office acknowledged that it was contending with the dreaded D-word.

Consumer prices and deflationary pressures have been facing Japan for months, but this summer the pace began to quicken. On Nov. 20, Japan’s Cabinet Office issued a monthly report that for the first time since 2006 acknowledged that the country was suffering from deflation, reports The Economist.

In September, prices slumped by 2.2% from a year earlier. This is partly because the country is still loaded with excess capacity after the collapse in exports during the global financial crisis, and partly because oil prices were lower in September than in the same month last year. (What a strong yen means).

Japan has to face down more hardships in the near future. The country’s aging population is forcing retailers to cut prices to gain market share. The Bank of Japan does not see deflation as a threat and believes that a surge in private sector demand will cause the economy to turn around. (Signs the economy could turn around).

James Simms for The Wall Street Journal reports that the domestic demand deflator plunged 2.6%—the largest drop since 1958—indicating that companies are losing their ability to price goods and services. (How Japan’s small-caps could benefit).

Besides deflation, the economic front looks decent:

  • Third-quarter gross domestic product figures show that stimulus measures had their desired effect, luring shoppers into car dealerships and electronics stores;
  • Capital investment rebounded after last year’s demand shock and exports to Asia were strong;
  • Growth also was more balanced than in the prior quarter; GDP is up 1.2% more than the previous quarter, twice what analyst were forecasting;
  • Another stimulus package is being whispered about in Tokyo and another election is expected this year

It’s interesting to note that while Japan-focused ETFs are down year-to-date and below their long-term trend lines, Asia ETFs that exclude Japan are doing just fine.

For more stories about Japan, visit our Japan category.

  • iShares MSCI Japan Index (NYSEArca: EWJ): down 2.3% year-to-date
  • iShares S&P/TOPIX 150 (NYSEArca: ITF): down 2.5% year-to-date
  • PowerShares FTSE RAFI Japan (NYSEArca:PJO): down 5.9% year-to-date
  • CurrencyShares Japanese Yen Trust (NYSEArca: FXY): up 1.3% year-to-date

Read the disclaimer, as Tom Lydon is a board member of Rydex|SGI.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.