Japan ETFs In Focus On Early Elections

“Abenomics” has proved fruitful for the Japanese economy since its introduction two years ago and pulled the country out of deflationary pressures. But it started losing steam this year after an increase in sales tax from 5% to 8% levied in April that sharply lowered consumer spending and has pushed the world's third-largest economy into a deep recession.

The economy shrank 1.9% annually in the last quarter, higher than the initial reading of 1.6%. This was followed by the 7.3% contraction in the second quarter, which was the largest decline since the March 2011 earthquake and tsunami. The revised GDP numbers suggest a bleak picture of Japan’s economy. A drop in business spending and weak private consumption continued to weigh on economic growth.

The sluggish growth had prompted the Prime Minister Shinzo Abe to postpone the second tax hike planned for October 2015 until April 2017 and called for a snap election on December 14, two years ahead of schedule, to seek a fresh mandate for his overall Abenomics, which hinges on three tactics – extreme monetary easing, flexible fiscal policy and structural reforms.

Will Shinzo Abe Win?

With just two days to go, public polls suggest that Abe’s Liberal Democratic Party would have a landslide victory at the general election, gaining more than 300 of the 475 seats in the Lower House of Parliament. The survey also showed strong support for his decision to delay any further tax increase.

While the employment and wage conditions have no doubt improved under Abe’s leadership, Japanese firms are seeking more reforms to expedite growth in the country. This is especially true as more than half of the firms are looking for cuts in the corporate tax rate of 35% and other growth strategies, 23% are expecting measures to boost consumer spending such as income tax cuts, and another 19% want the government to prioritize fiscal reforms in order to combat the country’s huge debt.

In an adverse outcome, Abe could resign if his party fails to win just a majority of 238 seats (read: Japan's Monetary Easing Puts These Country ETFs in Focus).

ETFs in Focus

That being said, many investors may want to take a closer look at the ETFs targeting this nation. While there is several Japanese equity ETFs that could see good trading in the weeks ahead, we have highlighted three most popular funds that have a favorable Zacks Rank of ‘2’ or ‘3’.

iShares MSCI Japan (NYSE:EWJ)

This fund is the most popular and liquid ETF tracking the Japanese economy with AUM of $15.7 billion. It tracks the MSCI Japan Index and holds 317 stocks in its basket. Though it is slightly skewed toward the top firm – Toyota Motor – at 6.54%, other firms do not account for more than 2.72% of assets.

The product is widely spread out across consumer discretionary, industrials, financials and information technology that make up for double-digit exposure each in the basket. It trades in heavy volume of 28.2 million shares per day and charges 48 bps in annual fees. The fund has lost about 3.6% so far in the year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (see: all Developed Asia-Pacific ETFs here).

WisdomTree Japan Total Dividend (NYSE:DXJ)

The fund offers exposure to the Japanese stocks while at the same time provides a hedge against any fall in the Japanese yen. This is easily done by tracking the WisdomTree Japan Hedged Equity Index. Holding 324 stocks in its basket, the product is slightly concentrated on the top two firms – Toyota Motor and Mitsubishi – with 5.8% and 4.9% share, respectively. Other firms do not hold more than 3.57% of assets.

Consumer discretionary and industrials take the top two spots with 25.6% and 21.6% share, respectively, while information technology and financials round off the top four. The fund has amassed over $13.2 billion in its asset base while sees solid average daily volume of about 5 million shares. It charges 48 bps in annual fees and expense and has added 8.16% in the year-to-date time frame. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook.

db-X MSCI Japan Curr. Hedged Eq (NYSE:DBJP)

This product tracks the MSCI Japan US Dollar Hedged Index, which provides exposure to Japanese equity markets and hedges the Japanese yen to the U.S. dollar by selling Japanese yen forwards. The fund holds 315 securities in its basket with the largest allocation going to Toyota Motor while other firms make up for less than 2.8% of assets.

From a sector look, the ETF is a bit concentrated on consumer discretionary, industrials and financials that collectively account for more than three-fifths share in the basket. The fund is rich with AUM of $681 million and average daily volume of 139,000 shares. Expense ratio came in at 0.43%. The product is up about 5% this year and has a Zacks ETF Rank of 2 with a Medium risk outlook.

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