Japan’s Nikkei hit a 15-year high recently; and why not when the economy has a handful of positive economic indicators to cheer for. Though GDP growth was lower than expected, the economy managed to pull out of recession in the three months through December. GDP growth was boosted by exports, and the country’s annual exports in January increased the most since late 2013. Meanwhile, a Reuters poll showed that Japanese business sentiment improved in February. Also, The Bank of Japan noted that Japan’s economy is in a “moderate recovery trend.”
Japan has been making headlines since the latter half of 2014. Last year, the Bank of Japan governor Haruhiko Kuroda had stepped up the ambitious program launched by Prime Minister Shinzo Abe to resuscitate the Japanese economy. The BOJ governor announced that it will expand its monetary stimulus by stepping up asset purchases.
Later, Japan Prime Minister Shinzo Abe called for a snap election in mid-December — two years ahead of the scheduled election. Also, Abe delayed plans of hiking the unpopular sales tax. US-based Japan equity funds had also recorded its longest run of cash inflow in 2014 after attracting $ 1 billion for the week ending Nov 19. (Read: Japan Equity Funds Attract $ 1B on Snap Election and Sales Tax Delay)
While most economic indicators signal a rebound, helping Abenomics’ efforts to push economic reforms and revive the economy, it may be a good opportunity for mutual fund investors to invest in US-based Japan equity funds. The surging equity markets further increase the possibility of fund investors reaping the benefits.
Before we cherry pick the best funds to buy now, let’s look at the recent economic pointers in detail.
Japan Pulls Out of Recession, Exports Jump
Japan posted gross domestic product growth of 2.2% in the final quarter of 2014, which was lower than economists’ expectation of a 3.6% increase. Nonetheless, what is crucial is that the economy is out of recession and some experts opined that the worst is over for the country in the short term.
The world’s third-largest economy had slipped into a technical recession in the third quarter last year. The economy shrank 1.6% annually in the third quarter after plunging 7.3% in the second quarter. The news of recession had sparked off a heavy sell-off in the Japanese shares.
Exports jumped 2.7% in fourth quarter. This was the largest increase in four quarters. The robust gain was indicative of the positive impact of weak yen. Exporters of cars and electronics particularly have been enjoying high profits banking on weak yen. Exports to China was 1.27 trillion yen in December, the highest monthly export amount since Dec 2010. Exports to US, which is Japan’s biggest export destination, were 1.4 trillion yen, the best for a month since 2007.
In latest development, Japan’s annual exports in January also increased. Data from the Ministry of Finance showed exports jumped 17% year over year, again boosted by car shipment to the US and exports of electronic parts to Asia. Exports to US and Asia jumped 16.5% and 22.7% year on year, respectively. It was the fifth consecutive month of gains.
Monetary Policy Unchanged
The improving exports condition, among other factors, was also cited by the Bank of Japan to be indicative of Japan’s economy being in a “moderate recovery trend.” Improved corporate investment and industrial production were the other positive signs. Meanwhile, the plunge in real estate investment is beginning to end.
The statements came at the end of the latest monthly policy meeting; wherein the monetary policy was kept unchanged. BoJ governor Haruhiko Kuroda’s remarks indicate Japan’s central bank will largely ignore lower inflation, an effect of lower oil prices. Additionally, further monetary stimulus is unlikely unless the BoJ fails to achieve its 2% inflation target.
Kuroda said: “I don’t think there have been any negative effects from last October’s decision to expand monetary easing…As I’ve said before, exchange rate changes are positive for some industries and companies and negative for others, depending on their situation. But as long as the exchange rate reflects economic fundamentals. . . I don’t think it is bad for the economy.”
Japan Equity Mutual Funds to Buy
Japan equities have been rallying this year and did so over one-year period too despite the many concerns. This year, Nikkei 225 is up 5.1% and had gained 28.1% over 1-year period. Investment climate in Japan might be profitable and investors may look into the following 2 Japan mutual funds, which carries a Zacks Mutual Fund Rank #1 (Strong Buy).
Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.
These funds also carry low expense ratio and have no sales load attached. The funds also have a proven track record of decent returns.
Fidelity Japan Smaller Companies (FJSCX) seeks capital appreciation over the long term. It invests most of its assets in Japanese securities or other instruments economically connected with Japan. The companies should have market cap similar to the ones listed in Russell/Nomura Mid-Small Cap Index or the Japanese Association of Securities Dealers Automated Quotations.
The fund carries a Zacks Mutual Fund Rank #1. The fund has returned 5.7% so far this year and its one-year return stands at 3.7%. The 3 and 5-year annualized returns are 16.4% and 11.5%, respectively. FJSCX carries an annual expense ratio of 1%, lower than the category average of 1.48%.
Matthews Japan Investor (MJFOX) invests most of its assets in preferred and common stocks of firms located in Japan. The fund may invest in companies of all sizes, but the adviser expects them to be mid to large-cap firms.
The fund carries a Zacks Mutual Fund Rank #1. The fund has returned 8.7% so far this year and its one-year return stands at 7.5%. The 3 and 5-year annualized returns are 13.8% and 11.2%, respectively. MJFOX carries an annual expense ratio of 1.10%, lower than the category average of 1.48%.
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