Surging Japan ETFs Ride New Tail Wind

November 08, 2017

YTD Returns For DFJ, SCJ


Stable Government

Underpinning Koll's bullish view on Japanese stocks is his enthusiasm about the country's economy, especially in light of Prime Minister Abe's victory two weeks ago.

Following the election, Abe is ruling Japan with the backing of a two-thirds super-majority in parliament, making for a stable government. Both fiscal and monetary policy are expected to remain stimulative, with the Bank of Japan buying enormous amounts of government debt.

"For all intents and purposes, in Japan, these is no difference between [monetary] and fiscal policies anymore," Koll said.

He pointed out that the Japanese Treasury issues about $40 trillion yen per year, and the bank of Japan buys about $80 trillion yen. Shockingly, the Bank of Japan owns about half the entire debt load of the Japanese government.

"This is something you don't see in normal economies. In history, you only observe this type of debt monetization during times of war," Koll said.

It's the reason many analysts believe the Japanese yen is poised to decline against the U.S. dollar.

According to Brad Bechtel, currency strategist at Jefferies, Abe's victory is a green light for the dollar to move higher against the yen. He sees the USD/JPY exchange rate moving from current levels of around 114 to 118 in the first quarter of next year, before potentially rising more from there.

Bearish Case
Not all analysts are bullish on the fortunes of Japan. Charles Sizemore, portfolio manager at Interactive Brokers Asset Management, sees it as a short-term trade at best.

"I view Japan as a potential short-term trade and not as a viable long-term investment," he told U.S. News. "Over a period of months or even a few years, central bank stimulus can do wonders for stock prices, and that's what you're seeing in Japan today. The Bank of Japan actively buys broad-market Japanese ETFs, as for all intents and purposes they were running out of bonds to buy."

Robert Johnson, CEO of The American College of Financial Services, agrees that the long-term prognosis for Japanese stocks is bearish.

"I would not put my money in Japan right now. The reason is that the demographics of the Japanese population are not favorable for long-term future stock market growth," he said. "Simply put, the birth rate in Japan has declined considerably over the past 40 years. The result is fewer consumers and fewer workers to fuel the economy, while the number of retirees is increasing dramatically."

"Additionally, Japan is not a country that embraces immigration," Johnson noted. "The long-term investment outlook for Japan is not positive."

Contact Sumit Roy at [email protected]


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