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Is it the Right Time to Invest in Japan ETFs? Let's Explore

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The world’s third-largest economy has been grappling with multiples issues like the coronavirus outbreak, tanking economic growth and tensions with China. In such a scenario, Japan's longest-serving prime minister, Shinzo Abe, resigned on Aug 28 due to health issues. Now, Japan’s Chief Cabinet Secretary Yoshihide Suga, former defense minister Shigeru Ishiba and ex-foreign minister Fumio Kishida will be contesting for the leadership role in the Liberal Democratic Party (LDP) leadership election on Sep 14.

Heightening concerns, Japan’s economy contracted an annualised 28.1% in the second quarter of 2020, comparing unfavorably with the initial estimate of a 27.8% contraction, according to the revised data from the Cabinet Office (per a Reuters article). However, the revised GDP figure for the April-June quarter looked better in comparison to a median forecast of a 28.6% contraction, per a Reuters poll. Also, Japan’s household spending declined 7.6% year over year in July in comparison with a median market forecast of a 3.7% fall (per a Reuters article). This was largely an outcome of people avoiding eating outdoors and postponing travel plans.

Any Silver Lining?

Going by a Reuters article, chances are higher for Suga to win the LDP leadership election as he is believed to have the parliamentary majority. Suga has said in his first campaign speech that he will continue to pursue Abe’s signature “Abenomics” policies that include hyper-easy monetary policies, massive government monetary stimulus and a flexible spending approach to support Japan’s tanking economy (per a Reuters article).

Moreover, Warren Buffet’s Berkshire Hathaway’s (BRK.A) has invested more than a 5% stake in each of the five leading Japanese trading companies, namely, Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui & Co., and Sumitomo Corp. Going on, the investment is valued at nearly $6.25 billion based on the trading houses’ closing prices on Aug 28, per a CNBC article.

The Japan trading companies, which are also known as “sogo shosha,” are conglomerates that import almost everything, from energy and metals to food and textiles and also provide services to manufacturers, according to a CNBC article. Berkshire has announced plans to hold investments for the long term, with the possibility to expand its holdings in any of the companies up to a maximum of 9.9%, depending on price (per a CNBC article).

Japan's Olympic minister Seiko Hashimoto has also commented that she believes the Tokyo Games that were postponed due to the coronavirus crisis will be definitely held next year, taking into account the preparations being made by athletes and others associated with the tournament, as per the sources. The Tokyo Olympics will definitely be a strong support to Japan’s economy next year.

Japan ETFs in Focus

Against this backdrop, investors can keep a tab on Japan ETFs like iShares MSCI Japan ETF (EWJ - Free Report) , JPMorgan BetaBuilders Japan ETF (BBJP - Free Report) , WisdomTree Japan SmallCap Dividend Fund (DFJ - Free Report) , Franklin FTSE Japan ETF (FLJP - Free Report) and iShares MSCI Japan Small-Cap ETF (SCJ - Free Report) .

EWJ 

This fund tracks the investment returns of the MSCI Japan Index. It comprises 320 holdings. The fund’s AUM is $9.88 billion and expense ratio, 0.49% (read: Buffett Announces Stakes in Japan Trading Firms: ETFs to Watch).

BBJP 

This fund tracks the investment returns of the Morningstar Japan Target Market Exposure Index. It comprises 368 holdings. The fund’s AUM is $5.12 billion, while its expense ratio stands at 0.19%.

DFJ 

This fund tracks the investment returns of the WisdomTree Japan SmallCap Dividend Index. It consists of 766 holdings. The fund’s AUM is $239.9 million and the expense ratio, 0.58% (read: Will New Prime Minister & Buffett's Bet Boost Japan ETFs?).

FLJP 

The fund tracks the performance of the FTSE Japan Capped Index. It comprises 503 holdings. The fund’s AUM is $446.2 million and the expense ratio, 0.09%.

SCJ

The fund tracks the MSCI Japan Small Cap Index. It comprises 975 holdings. The fund’s AUM is $62.7 million and the expense ratio, 0.49%.

Caveat

Analysts are estimating Japan’s GDP to rebound about 13% in the ongoing quarter, per a Bloomberg article. However, Japan’s contracting population will continue to be a huge hurdle for the nation’s economic growth over the longer term and as such it is being believed the country might face severe problems to reach its pre-pandemic size, per the same article. Also, Japan’s new leader will have to first address the issue of controlling the ongoing pandemic and also work toward digitizing the nation and create more work-from-home opportunities.

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