Investing in Japan

Submitted By Don Vialoux

Technical indicators fail to show next move for the Nikkei

Opportunities to invest in Japanese through Exchange Traded Funds have expanded significantly recently. Six ETFs on Japanese equity indices have been launched during the past year.

Seven Exchange Traded Funds on Japan now are available. Three Exchange Traded Funds track indices similar to the Nikkei 225 Index. IShares on the Japan Index (AMEX: EWJ, BullBoards) are by far the most actively traded ETF. StreetTRACKS recently launched an ETF on the Russell/Nomura Japan Prime Index (AMEX: JPP, BullBoards). Claymore Investments brought out a fully hedged Canadian based ETF on the Claymore Japan Fundamental Index (TSX: T.CJP, BullBoards). StreetTRACKS also began trading an ETF on the Russell/Nomura Japan Small Cap Index (AMEX: JSC, BullBoards). Wisdom Tree issued three dividend-based ETFs: the Japan Total Dividend fund (NYSE: DXJ, BullBoards), the Japan High Yielding Equity Fund (NYSE: DNL, BullBoards) and the Japan Small Cap Dividend fund (NYSE: DFJ, BullBoards). Following is a summary:

Seasonal influences

The Nikkei Index has a period of seasonal strength from the end of October to the end of March. The trade has been profitable in seven of the past ten periods with an average gain per period of 7.2%. In contrast, the trade from the end of March to the end of October was profitable only on three of the past 10 periods with an average loss per period of 7.2%. Following is a chart showing optimal seasonal entry and exit points during the past six years:

Fundamental influences

The Japanese economy is growing at an annual rate in the 1-2% range. Growth mainly is coming from greater trade with China and other Far East countries. Japan's trade surplus at the end of April rose 50% despite a small decline in its trade surplus with the U.S. The export part of the economy has been helped partially by a weak currency. The Japanese Yen is testing a four year low. The Bank of Japan has been reluctant to raise interest rates partially due to concerns that higher interest rates could boost the Yen and curtail exports.

Political influences

Parliamentary elections are expected later this year. Assuming parliament adjourns as scheduled on June 23, the next election for the Diet is likely to be held on July 5 and the next election for the Upper House is likely to be held on July 22.

Technical influences

Seasonal influences peaked earlier than usual this year. The Nikkei Index peaked at the end of February. Its long term trend remains up, however, the Index has failed to reach new highs in recent months when equity indices for most of the developed countries in the world have reached multi-year and all-time highs. Strength relative to the S&P 500 has been negative during the past three months. The Index has developed a six month trading range between 16,533 and 18,300. Short term momentum data (Moving Average Convergence Divergence and Relative Strength Index) is neutral and has yet to indicate the timing or direction of the next significant intermediate move.