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Japan seems to be finally turning around. The country’s GDP grew at an annualized rate of 3.5% during the first quarter of 2013, up sharply from 1% growth recorded during the previous quarter and substantially stronger than estimates.

It appears that the aggressive expansionary measures taken by the Abe government, including “unlimited” easing in order to weaken the currency, make exports competitive and pull Japan out of its deflationary spiral, are delivering results. Japanese exports and consumer spending accelerated during the quarter, though businesses still seemed a bit reluctant to spend. Exports benefited immensely from a weaker yen—down ~18% year-to-date against the dollar.

Japanese stocks are up about 45% this year in anticipation of stronger economic growth. And while the ETF tracking the broader equity market iShares MSCI Japan Index Fund (EWJ - ETF report) is up 24% year-to-date, the two currency hedged ETFs--WisdomTree Japan Hedged Equity Fund (DXJ - ETF report) and MSCI Japan Hedged Equity Fund Fundamentals (DBJP - ETF report), which provide exposure to Japanese stocks without any exposure to the currency are up more than 40% during the same period. (DXJ vs. DBJP: Which is the Better Hedged Japan ETF?)

So, while it appears that the worst for the Japanese economy is now over, long lasting results will depend on how policymakers address the underlying structural problems, that have been affecting the economy for decades. The government will have to introduce significant fiscal and structural reforms to maintain the growth momentum.

Do you think that Japan is now on path to economic recovery after more than two decades of stagnation?

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