It almost seems insensitive to discuss investment opportunities in Japan while damage is still being assessed, lives are still unaccounted for and the nuclear situation is uncertain. Investing in Japanese-related exchange traded funds (ETFs) provide added stability and a vote of confidence that would not only be appreciated by the Japanese people but should result in great investment opportunities in the future.
In the wake of recent disasters, preliminary estimates put damage over $100-200 billion, with most of the damage in infrastructure, such as roads, ports, railroads and nuclear power plants. This will be the most expensive earthquake in history. Accounting for about 8% of GDP, the northern Tohoku region was most affected by the disaster. [Tom Lydon on CNBC Discussing Japan’s Recovery.]
Once the rebuilding effort gets underway, it will put more people to work and money back into the economy. Industrial, financial and consumer discretionary sectors should all be positively affected by rejuvenation in infrastructure and uptick in workers. [Japan: Restructuring with ETFs.]
- iShares MSCI Japan Index (NYSArca: EWJ). Industrials is 19.97%, financials is 17.90% and consumer discretionary is 19.35%. The fund is mainly comprised of large-caps, with Toyota (NYSE: TM) and Honda (NYSEArca: HMC) as its largest holdings. This will be a diversified play when Japanese markets rebound.
- SPDR Russell/Nomura Small Cap Japan ETF (NYSEArca: JSC). Industrials is 23.14%, consumer discretionary is 22.11% and financials is 14.50%. The fund is mainly comprised of small-caps, which are better positioned to participate in rebounds.
The Bank of Japan has poured a record $183 billion into the financial system and doubled the size of its asset-purchase plan. The disaster will have a negative affect on GDP in the short run, but this move should be positive for sentiment. The Bank of Japan is slated to buy 3 trillion yen, or $37.1 billion, in government bonds to further shore up liquidity in the banks.
Japanese Minister for Financial Services said they will ban naked short selling which could add pressure on stocks. Still, it would be natural to see continued selling this week while damage is still being assessed. For the long-term, the country still has to deal with its aging population and slow GDP growth, with low interest rates.
The Ministry of Finance projected in January that government debt will increase 5.8% to a record 997.7 trillion yen, or $12.2 trillion, in the year starting April 1, and subsequently, Prime Minister Naoto Kan will break his pledge to limit bond sales to 44.3 trillion yen, or $54.8 billion, a year. Japanese bonds have dropped 2.81% this year, the third-worst performer in Bloomberg/EFFAS Indexes. The yen has depreciated against 13 of its 16 most traded counterparts, but should gain back some ground after money is repatriated to help fund the reconstruction – Japan will likely sell U.S. Treasuries, putting upward pressure on yields. [Japan Worries Impact ETFs.]
- Rydex CurrencyShares Japanese Yen Trust (NYSEArca: FXY)
For more information on Japan, visit our Japan category.
Read the disclaimer; Tom Lydon is a board member of Rydex|SGI.
Max Chen contributed to this article.
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.