Japan’s ETF jackpot

The Japanese market boom has produced a hot return for Australian ETF investors.

Summary: Japan has lived up its name as the land of the rising sun, with its economic recovery delivering strong returns to investors brave enough to stay the course. In the 12 months to September 30, the Nikkei gained close to 62%. Experts expect Japan to maintain its growth momentum, although storm clouds could soon be on the way in the form of tax changes.
Key take-out: the iShares Japanese ETF –the only pure-play Japanese ETF available to Australian investors – has returned over 45% in the past 12 months and 37% since the start of the year.
Key beneficiaries: General investors. Category: Economics and strategy.

After years of giving Japan the cold shoulder, international investors have been flocking back to the Asian powerhouse … but it’s been a wild ride.

As of September 2013, Abenomics – the name given to the suite of measures brought in by Japanese Prime Minister Shinzo Abe – seems successful.

After a dizzying 80% rise in the six months to mid-May, the storm clouds rolled back in and the Japanese market indicator, the Nikkei 225, turned sharply lower, plunging 20% in the space of just three weeks.

Suddenly, investors were reliving all the horrors of the country’s previous burst bubbles, with critics predicting the world’s third-biggest economy was once again headed back toward irrelevance. 

While many ran for the exit at the first sign of trouble, those brave enough to stay the course have seen most of the losses reversed as the country continues its recovery.

All up, the Nikkei 225 has been one of the best-performing stockmarkets of 2013, surging more than 38% since the start of the year. In the 12 months to September 30, the Nikkei gained close to 62%. In the previous 12 months, the index rose just 2%.

So, how have investors Australian investors fared?

For those who got in on the action early, it’s been a case of riding the ‘easy money’ wave. Judging by the growth in the iShares Japanese ETF –the only pure-play Japanese ETF available to Australian investors – a significant number saw an opportunity too good to miss.

Indeed, the iShares Japanese ETF has seen assets under management balloon.

“The renewed interest in Japan is in line with the broader international theme we are seeing, particularly in the ETF market,” says Jonathan Howie, director & ETF specialist at Blackrock, which manages iShares’ ETFs.

“The growth rate of the iShares Japan ETF has been good this year as investors seek to capitalise on the potential longer-term impact of the Japanese government’s attempt to re-invigorate their economy,” he said.

As you can see from the chart below, the iShares Japanese ETF is up 45% in the past 12 months and 37% since the start of the year.

Those still watching from the sidelines waiting to time their entry may be disappointed. It’s clear the easy money has already been made.

“The market’s gone from being extremely cheap to now being fair value, or even slightly expensive,” says AMP chief economist, Shane Oliver.

“In fact, it’s one of the only markets globally that is on the expensive side of fair value.”

But that’s not to say the market is headed lower. While the phenomenal rise over the past year may not be repeated any time soon, Oliver still expects the market to outperform global markets in the coming year.

Indeed, he forecasts it could rise by 15-20% in the coming 12 months as the Bank of Japan continues with its massive stimulus program.

This stimulus program, aka Abenomics, is what brought confidence back to the economy after years of stagnation.

As Jeremy Lawson writes in today’s edition, the first two of Abe’s “three arrows” have gone to plan (see Accelerating growth points to earnings over yield). The government has embarked on a massive fiscal stimulus alongside aggressive monetary easing from the Bank of Japan. The yen has weakened dramatically, the market has rocketed and deflation looks to finally be coming to an end. But the third arrow – structural reforms to boost Japan's competitiveness – is the true test of this bold strategy’s success.

The storm clouds could soon be on the way. The government’s decision this week to raise the sales tax will test investors’ faith in its longevity.

The tax increase, from 5% to 8%, will come into effect from April 2014 and is the first of a two-step process whereby the tax is expected to reach 10% by 2015.

The decision has rekindled memories of a similar move the Japanese government made in 1997, when it raised the sales tax from 3% to 5%, sending the economy into a tailspin and sending the market sharply lower in the following months.

But back then, they didn’t have Abenomics to fall back on. Shinzo Abe’s attack on the strong yen and deflation is far from over and will keep a measure of confidence in the market.

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