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Japan ETFs: One Year After The Fukushima Disaster

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Roughly a year ago, one of the most powerful earthquakes in modern history hit off the coast of Japan. The 2011 Tohoku earthquake measured 9.0, putting the tremor among the five most powerful quakes since at least 1900, causing widespread devastation across the northern part of the country. While the quake was devastating, the real damage was arguably caused by the subsequent tsunami which was reported to reach over 130 feet at one point.

This wall of water swept away entire towns on the Japanese coast, killed over 15,000, and along with the quake/other types of damage, resulted in close to a quarter trillion dollars in total economic costs. Yet not even this massive tidal wave would prove to be Japan’s biggest worry, as the Fukushima nuclear power plant experienced a significant meltdown throwing much of the nation into a panic. This plant saw multiple explosions as a lack of coolant and flooding made it impossible to keep the core at a reasonable temperature, threatening to make large swaths of Japan inhabitable for decades to come (read Three ETFs With Incredible Diversification).

Thanks to this fear, several hundred thousand people were evacuated, radiation was found in areas directly around the region, and the safety of nuclear power around the world was called into question. Many countries quickly renounced the use of nuclear power while Japan continued to stop the flow of radioactive materials from damaging its major cities. Luckily, however, the crisis was eventually halted, and up to this point, there have been no casualties from what is now widely regarded as the second worst nuclear accident in human history.

The financial impact from this disaster was also quick and devastating, shocking the entire country. Japanese investors quickly repatriated their assets from around the world, pushing up the yen sharply against major world currencies while the Bank of Japan sought to provide unprecedented amounts of liquidity to the beleaguered Japanese markets. Unsurprisingly given the devastation and the uncertainty over the full impact of the nuclear accident, there was also a large sell-off in Japanese equities following the tragedy (read Top Three Currency ETFs).

In fact, the main Japanese ETF, the iShares MSCI Japan Index Fund (EWJ) sank by as much as 10% in the week following the tsunami, reigniting more fears over another lost decade for Japanese securities. This threat, along with the quick appreciation of Japanese yen has led to a $230 million outflow from EWJ over the past year, a factor that led to another period of weakness for the market. This stretched into the summer as Japanese securities lost more than 20% of their value at their lowest point in the year.

Despite the tragedy and the headwinds facing the nation, Japan has managed to bounce back pretty well, especially over the past two months. Japanese equities have started the year on a pretty strong note as the country continues to be a relative safe haven both in Asia compared to many emerging markets, as well as a developed market alternative to European investments. As a result, EWJ has surged by nearly 10% so far year-to-date, outpacing a similar investment in the S&P 500 by nearly 100 basis points in this time frame (see Ten Best New ETFs Of 2011).

Beyond the gold standard of EWJ, investors also saw similar performances in a number of other Japanese focused ETFs. The other funds with large cap holdings, such as the iShares S&P/TOPIX 150 ETF (ITF) and the SPDR Russell/Nomura PRIME Japan ETF (JPP), both lost more than 10%  over the past 52 week period, roughly in-line with the performance of EWJ in the time frame. A better alternative, that still has a large cap focus, has turned out to be the WisdomTree Japan Total Dividend Fund (DXJ), which looks mostly at large cap securities but has a focus on arguably safer dividend securities. This fund lost just 9.3% over the past year but has gained close to 13.2% in 2012 so far, meaning it has outperformed in both time periods.

If investors are looking for small caps instead, there are currently three options in the space; SCJ, JSC, and DFJ. All three have beaten out their large cap counterparts when taking into account the past one year period, although they have begun to trail when focusing on 2012. This could be because small caps tend to be more exposed to local events and thus stand to benefit more than their export-sensitive large cap peers when the yen is surging in value. However, as the situation has moderated in recent months and the economy has picked up, they have lost their leadership role in the space to mega cap firms (read For Japan ETFs, Think Small Caps).

So while the disaster that Japan suffered a year ago is still fresh in the minds of many, equities have broadly shrugged off the event in recent weeks. All Japanese ETFs are up significantly so far in 2012—including the new ones that debuted after Fukushima—outpacing many other developed markets in the time frame.  Clearly, Japan is still on the mend but stocks in the region could be a decent pick for longer-term investors. The country has demonstrated tremendous resiliency in the face of nearly unprecedented turmoil, suggesting that if Japan ETFs can recover this quickly after a nuclear accident, it will take a whole lot to keep the Japanese economy down for the count.

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