Developed Asia and some related single-country ETFs, including the iShares MSCI Japan ETF (NYSEArca: EWJ), the largest Japan-related ETF on the market, are currently offering compelling discounts relative to other major developed markets.
However, like other developed markets, Japan has seen its equity markets struggle in 2018. EWJ is lower by almost 16.50% this year and some market observers are expressing concerns about the world’s third-largest economy heading into 2019.
Earlier this year, there was rising speculation that the BOJ was debating moves to scale back its massive monetary stimulus policy, Reuters reports. Officials were holding preliminary discussions on possible changes, which include adjustments to interest rate targets and stock-buying techniques, along with ways to make its stimulus program more sustainable.
“A number of forces will challenge Japanese growth in 2019,” said BlackRock in a recent note. “External demand will weaken due to slower Chinese and U.S. growth and from trade uncertainty with the U.S. Domestic demand will likely peak in the third quarter of 2019, ahead of the October VAT hike.”
What’s Next
Japanese stock markets have remained range bound for most of 2018 as it slowly recovers from the recent selling pressure. Nevertheless, the developed market is still outperforming the global developed ex-U.S. equities benchmark and it is less expensive. BlackRock, though, maintains a neutral outlook on this country.
Nevertheless, Japan does show some solid fundamentals. Specifically, the weaker yen, strong corporate fundamentals, bargain valuations and central bank buying are all positives. Furthermore, Japan’s political temperature is relatively stable.
“We expect the Bank of Japan (BoJ) to remain accommodative, however any changes could lead to yen appreciation and further undercut export growth,” according to BlackRock.
One of the primary reasons some analysts cite for embracing Japanese stocks is lower valuations.
“Japanese equities are already cheap relative to history, but 2019 earnings growth expectations are weak (4%) and economic risks look skewed to the downside,” said BlackRock.
For more information on the Japanese markets, visit our Japan category.