The Bank of Japan is meeting on Friday to decide new monetary measures, although there are some doubts about the amounts that will be announced, most analysts are expecting an increase of the assets purchase program that the Bank of Japan is implementing. There are good reasons to expect more monetary stimulus in Japan for the middle term, and some investment alternatives stand to benefit from such measures.Japan doesn´t only face the problem of uninspiring economic activity, the country has a long history of deflation, and monetary authorities have recently announced they will “do powerful easing to achieve 1% inflation if needed.” Deflationary pressures can be very dangerous, they tend to reinforce themselves and are a very strong headwind against economic recovery.
Consumers usually postpone purchases when they believe prices will keep falling, this reduces demand and brings more price decreases and deflationary adjustments. The vicious cycle of deflation and recession can be a very traumatic experience of which there is no easy way out. For this reason, the Bank of Japan has two important and interrelated reasons to boost expansionary measures: both economic activity and price levels need some help from authorities.
If we have learned something from expansionary monetary policies in the US is that their merits at reinvigorating the real economy may be questioned, but stock markets react positively to easing monetary conditions. Keeping in mind that Japanese stocks have been lagging other markets for years, it may be an interesting time to consider adding some exposure to Japan.
IShares MSCI Japan is the biggest and most liquid ETF for investing in Japanese stocks, the ETF holds more than 300 positions and has assets under management north of $5.7 billion. The stocks in this portfolio are trading at an average P/E ratio of 14, which is quite reasonable, and it yields more than 1.9%. Investors looking for a diversified exposure to Japan stocks could consider this ETF as simple low cost alternative; other smaller instruments however, could be more attractive in the long term.
WisdomTree Japan Hedged Equity is a very smart possibility if you are looking for ways to bet on a bullish scenario for Japanese stocks due to monetary easing in Japan. This ETF has long exposure to equities but a short exposure to Yen, so it could provide the benefits of a rising stock market without the costs of a declining currency in the land of the rising sun.
DXJ is much smaller than EWJ with $606 million in assets under management, but has been beating its bigger competitor with a 17.7% return in the year to date return versus a much smaller 11.7% for EWJ. The idea of being long Japanese equities and hedged in terms of currency exposure seems to be working fine so far.
Monetary expansion is usually a good tailwind for dividend paying stocks, when interest rates are at record lows many investors start looking for alternatives for income among dividend stocks, and this could benefit the dividend paying names of Wisdom Tree Japan Small Cap Dividend Fund.
This ETF invests in small companies with high dividends, but smaller companies are not particularly leaders in the dividend space, so this instrument is currently yielding a 2.1% which is not substantially higher than the yield provided by other Japan based ETFs. DXJ with its double exposure to the upside in equities and downside in Yen looks like a better alternative.
Another possibility would be targeting big Japanese exporters, like for example Toyota and Sony. These companies would clearly be benefited from a lower Yen, in fact, many Japanese exporters have been asking for more easing from the Bank of Japan for a long time.
But exchange rates are not the only relevant variable for this kind of companies, and they have some serious problems that go much farther than those related to the value of the Yen. Toyota has been losing market share against competitors from the US and other countries since it seems to be lagging in terms of quality and design lately. No monetary measure is going to fix that problem.
Sony is planning an aggressive restructuring in order to recover some of the profitability it lost many years ago. Things could get better if the company regains some focus on product design and innovation; there are many things that could be improved under the recently launched “One Sony” initiative, which plans to improve strategic focus and operations. A weaker Yen would help Sony in its turnaround effort, but just like in Toyota´s example, currency movements are not a definitive solution for the strategic problems of companies.
Japan needs more monetary stimulus to avid both a recession in activity and a deflation in prices, an instrument like DXJ looks quite interesting in a context of falling Yen and / or rising Japanese equities. It’s amazing how sometimes an investment strategy which may sound quite complex can be implemented via the very simple operation of just buying an ETF.
This story was originally published by The Motley Fool.