Japanese markets and country-specific exchange traded funds could find further support as Prime Minister Shinzo Abe implements economic structural reforms.
“After years of trekking through the economic doldrums, Japanese policymakers have signaled a renewed determination to end the slump,” according to a Deutsche Asset & Wealth Management research note. “Japan’s Prime Minister, Shinzo Abe, is fighting the malaise with the three ‘arrows’ of ‘Abenomics’: monetary easing, fiscal stimulus, and structural reform. With Abe’s third arrow of structural reform, we see Japan’s renewed focus on capital management as the next potential catalyst for the equity market.”
Consequently, with a revitalized corporate Japan, investors may access the market through a number of Japan country-specific ETFs. For instance, the recently launched Deutsche X-trackers Japan JPX-Nikkei 400 Equity ETF (NYSEArca: JPN) tracks the relatively new JPX-Nikkei 400 Index, which is also being used as a benchmark for Japan’s Government Pension Investment Fund, the largest pension fund in the world. [A New ETF for Japan’s Revitalized Equity Market]
As the Bank of Japan adheres to a loose monetary policy and the Federal Reserve moves toward hiking interest rates, currency risks will be an issue with overseas investments. Nevertheless, investors may utilize yen currency-hedged options to take a more pure play on the underlying Japanese markets.
For instance, the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) tracks a MSCI Japan U.S. Dollar Hedged Index, which is exposed to Japanese equities but mitigates exposure to fluctuations between the USD and the yen. Additionally, the recently launched Deutsche X-trackers Japan JPX-Nikkei 400 Hedged Equity ETF (NYSEArca: JPNH) is the currency-hedged equivalent to JPN. [Deutsche Adds Six New International Currency-Hedged ETFs]
DBJP, with a 28.9% average annualized 3-year return, has enjoyed strong gains after Prime Minister Abe introduced his so-called three arrows. Monetary easing and fiscal stimulus have buoyed Japanese equities and weakened the yen in the past few years.
“The effect on the stock market is clear: A strengthening, both directly through Bank of Japan equity purchases, and, indirectly, through the positive effect on corporate profitability that results from a weakening yen,” according to DeAWM.
Looking ahead, Abe’s third arrow, structural reforms, will include a range of initiatives to further support growth, including the “Japan Revitalization Strategy,” which will overhaul key sectors, cut corporate tax rates and raise labor force participation by women.
“We are optimistic that the ongoing reforms targeting the capital efficiency of Japanese companies could be the equity market’s next catalyst and have lasting positive effects,” according to DeAWM. “We have already seen the fruits of these policies in the form of improving earnings, record stock buybacks and dividend revisions.”
For more information on Japan, visit our Japan category.
Max Chen contributed to this article.