2 Key Trends Benefiting Japan ETFs

February 10, 2017

It could be time to take another look at Japan equity ETFs. The segment, which seems to have gone from hot to cold in the past few years, now appears to have two key trends in its favor.

The first is talks of a new deal with the U.S. that would involve massive investment, growth opportunities and beneficial trade deals for both sides. The second is attractive valuations for Japanese stocks, at least according to historical norms.

Here’s what to consider …

Positive Backdrop Includes Infrastructure Investment & Trade

Japan is looking to work closely with the U.S. on new trade deals and on massive infrastructure projects. A so-called “U.S.-Japan economic cooperation plan” that Japan’s Prime Minister Shinzo Abe is expected to unveil in the days ahead would include a $450 billion infrastructure market in the U.S. to be funded largely by Japanese investors.

According to WisdomTree’s Head of Japan Jesper Koll, “Japan would offer to seed-fund these projects with low-interest loans, mobilizing resources from Japan’s public pension fund and other public lenders.”

Abe is also expected to pursue bilateral trade agreements with the U.S. that would benefit various sectors of the Japanese market. Abe and U.S. President Trump are set to meet today and Saturday.

“If, as we suspect, the meeting goes well, the implications are poised to be positive for U.S.-Japan economic and financial relations,” Koll said. “Trump’s America and Abe’s Japan are a ‘match made in heaven,’ not just because both leaders share a basic ‘strongman leadership’ and ‘my country first’ philosophy, but because the economic and financial agendas are very much aligned.”

What this deal means to ETF investors is that infrastructure names, and applied robotics companies, should benefit almost immediately, and longer term, currency manipulation in that part of Japan will subside as trade agreements take effect, Koll says.

“Japan’s capital goods sector is poised to benefit most directly,” he added. “In addition, the greater and deeper the Trump-Abe relationship develops, the lower the risk of erratic bilateral frictions should become. Specifically, the more positive U.S.-Japan economic cooperation, the less likely it should get for Japan to be suspected of manipulating its currency.”

Stock Valuations Are Attractive

Japan is offering value, at least historically speaking.

In a blog this week, Charlie Reinhard, chief portfolio strategist at MainStay Investments, pointed out that Japan’s stock market’s valuations are low from a historical perspective. Look at the chart below from Reinhard’s commentary:

The chart shows the historical forward price-to-earnings (P/E) ratio of the Japanese stock market as being below its 1990-to-present average.

His takeaway: Japan is offering value.



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