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The Japanese economy has long been at the receiving end of the beneficial easy money policy, which has put the economy on the growth path. Though Japanese inflation is yet to pick up meaningfully, an uptick in domestic demand as well as external demand is something investors should cheer for (read: Japan Economy on the Mend? ETFs in Focus).

As per Bank of Japan, the value of the country’s exports, adjusted for inflation, grew 3.9% in the first half of 2017 against the past six-month period.

Long Run of Economic Growth

A Reuters poll indicated that GDP in Q2 is expected to grow 2.5% year over year. The rate last scored in January-March 2016. On the other hand, Japan's GDP is expected to log six successive quarters of growth, which was last seen from January-March 2005 through April-June 2006. The expected 2.5% GDP growth would translate into 0.6% sequential growth after a revised 0.3% rise in the first quarter of this year (read: Japan's Exports Rise Fastest in 2 Years: ETFs in Focus).

Upbeat Consumer Sentiment

The Japanese economy has been facing labor crunch, which in turn is likely to push up wages. As per BlackRock, “wages are rising just enough [in Japan] to bolster domestic consumption without eroding profit margins.” Unemployment has dropped to a 25-year low in Japan and the job-to-applicant ratio is at an all-time high.

This is good news for consumer sentiment and spending. The Consumer Confidence Index in Japan increased to 43.8 in July of 2017 from 43.3 in June and surpassed market consensus of 43.6. This was the highest reading in consumer confidence since March.

Plus, higher stock prices are creating a wealth effect. Private consumption, which makes up about 60% of GDP, will likely grow 0.5% in the second quarter, following a 0.3% rise in the January-March period.

Compelling Valuation

Robust earnings reports from major companies should draw investor attention too. Blackrock expects Japanese companies’ earnings growth to touch a three-year high in 2017. Also, Blackrock believes that “Japanese stocks appear inexpensive on the global stage. They are trading at a 20% discount to U.S. peers on a 12-month forward price-to-earnings basis.”

What About Yen Strength?

There is only one glitch in the Japan story, i.e., a strengthening yen against the greenback. CurrencyShares Japanese Yen Trust (FXY - Free Report) gained about 3% in the last one month (as of August 7, 2017) and 2% in the last six months. This doesn’t make a great situation for Japan’s large-cap investing as this has wider foreign exposure.

Large-cap Japan ETF iShares MSCI Japan ETF (EWJ - Free Report) was up 8% in the last six months while currency-hedged Japan ETF WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) added about 4.3% and small-cap ETFiShares MSCI Japan Small-Cap ETF (SCJ - Free Report) with more a domestic focus jumped 12.7% in the last six months.

Investors can thus play Japan’s small-cap stocks and ETFs like SCJ in the coming days. Focus on quality and low volatility ETFs could also be intriguing (see all Asia-Pacific (Developed) ETFs here).

ETFs to Buy

iShares MSCI Japan Minimum Volatility ETF (JPMV - Free Report)

The Nikkei Stock Average Volatility Index has been roaming around its decade-low levels. Strategists are now fearing volatility in the second half. This explains why JPMV is a good pick now. The index of the fund reflects the performance of a minimum variance strategy applied to the large and mid-cap Japan equity universe.

SPDR MSCI Japan Quality Mix ETF (QJPN - Free Report)

The underlying index of the fund tracks the equity market performance of Japanese companies picked on the basis of three factors - value, quality, and low volatility.

Goldman Sachs ActiveBeta Japan Equity ETF (GSJY - Free Report)

The fund captures common sources of active equity returns, including value, momentum, quality and volatility of Japan issuers.

WisdomTree Japan SmallCap Dividend Fund (DFJ - Free Report)

The fund looks to track the performance of dividend-paying small capitalization companies in Japan.

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