ETF XRAY

Which Way Japan Market & ETFs?

By Carl Delfeld of Chartwell ETF Advisor and Chartwell Wealth Management

Which way will Japan exchange-traded funds such as the iShares MSCI Japan (EWJ) go as negative economic news fights what is perceived as very attractive valuations?

Japanese bankruptcies rose to a 4-year high in 2007 as record oil prices and a regulation-induced housing slump slashed profits according to report from barchart. In addition, corporate bankruptcies climbed for a second straight year, rising 6.4% as liabilities surged 4.1% to 5.7 trillion yen ($53.1 billion), the first increase in seven years. Insolvencies in the construction sector rose to a 4-year high after stricter building permit rules caused housing starts to fall to a four-decade low. It is the 1st time since Japan emerged from a recession in 2002 that overall insolvencies gained for back-to-back years.

But despite this bad news, Japanese stocks and ETFs rebounded from a 26-month low as investors snapped up shares of exporters such as Honda, after the yen weakened against the dollar, and as real estate companies clawed back significant losses. The yen recently traded at 107.87 to the dollar, after breaking into 105 territory on Wednesday to reach a 2½-year high acording to the Financial Times.

The Nikkei jumped 2.1 per cent to close at 13,783.45, while the broader Topix rose 2.2 per cent to 1,330.44. Honda, a holding of the Chartwell Global 30, jumped 3.9 per cent to Y3,220, having fallen 11 per cent in value until Wednesday. Toyota gained 3.1 per cent to Y5,470. Sony rose 2.7 per cent to Y5,660.

Real estate stocks gained ground after a UBS report that said shares prices of Japanese real estate companies could “bounce back sharply” with the easing of subprime woes. The Topix real estate index surged 5.7 per cent, while Mitsubishi Estate jumped 7 per cent to Y2,450.

The weakness in the Japanese yen may be short-lived as the unwinding of the carry trade should push yen upward. Valuations on the Japan's market second section, which represents small Japanese companies, appears to be trading collectively at below book value.

Join Chartwell ETF and learn more about which way Japan and Japan ETFs are likely to go.

Japan's Restaurants Beat Market and ETFs Hands Down

By Carl Delfeld of the Chartwell ETF Advisor

While Japan's market and the ETFs that track it such as the iShares MSCI Japan (EWJ) and the iShares S&P/Topix 150 (ITF) have disappointed investors, you can't say the same about its restaurants.

The coveted Michelin "star" is viewed by many as a symbol of international culinary excellence, and an honor for which restaurateurs and chefs literally die for. The launch of the Michelin Guide Tokyo was a blockbuster for Michelin and Asia and a shocker for the rest of the world, as it was the first time Michelin devoted a team of its own food critics to select excellent restaurants outside Europe and North America. What also sets it apart is that Tokyo is the only guide so far in which every one of its 150 restaurants were awarded at least one star. A restaurant that receives one or more stars is considered not only among the best in its country but also in the world.

Tokyo has long been known as one of the best places in the world to dine. With a total of 191 Michelin stars, Tokyo has become the world leader in gourmet dining with more stars than any other city in the world. By comparison, Paris, known for offering the best cuisine in the world, has 98 stars overall; London has 50 and is followed closely by New York City with 49; and San Francisco has a 34 stars.

Tokyo also stands out because of the variety of cuisines it offers in its restaurants is unmatched by any other major city—40% of Tokyo's 150 starred restaurants are non-Japanese restaurants. Of these, 75% are French, 14% are Italian and the remainder includes a handful of Chinese and Spanish restaurants. The French must be grinding their teeth but perhaps will just jump on the next flight to Tokyo.

Will Japan's markets earn more stars in 2008? Join the Chartwell Advisor and find out.

Japan Corporate Earnings a Drag on ETF

By Carl Delfeld of the Chartwell ETF Advisor

The Japanese market, and the ETFs that track it such as the iShares MSCI Japan (EWJ), is down 6 per cent so far this year in dollar terms, continues to disappoint investors even though it is trading at the low end of historical valuations. Now weak aggregate corporate profits are also a problem. Year-on-year operating profits for top-tier companies rose 6 per cent in the first half and full year forecasts will be lower. Analysts are similarly gloomy, having marked expectations progressively lower in the past six months.

The outlook is especially poor for non-manufacturers (excluding banks) where profits fell 3.4 per cent, according to Morgan Stanley. Banks may have reported smaller sub-prime exposure than their US peers, but top it up with domestic consumer finance woes and the dent is sizeable: financials’ profits were down 5.6 per cent.

The Financial Times notes that the second half looks even harder as remaining supportive factors, including a cheap yen, look less certain. The yen has been strengthening in recent weeks and on Wednesday hit Y109/US$1, above the level of most corporate assumptions for the second half. Goldman Sachs estimates that a 10 per cent move in dollar/yen foreign exchange rates affects pre-tax profit growth by just 2 per cent compared with 5 per cent in the 1990s. But even though higher oil prices are less damaging than was once the case, they still erode profit margins.

What will be the catalyst for growth and higher stock prices. Exports to China are slowing as has margin expansionand recently top-line growth. That will be harder to sustain if the US consumption slows down. One plus is that the Japanese market is undoubtedly getting cheaper: using companies’ own forecasts, it is trading at only 17 times this year’s earnings. Still, the yen ETF may be a better Japan play than its stockmarket.

Learn more about why Japan does have a place in your portfolio by joining the Chartwell ETF Advisor.

Giving Japan its Due

By Carl Delfeld, President, The Center for a New American Diplomacy

As part of a deal with North Korea in the six party nuclear disarmament talks; President Bush has decided to take North Korea off the U.S. list of state sponsors of terror.

This decision was made over the strong protests of Japan primarily because of North Korea’s stonewalling on providing Japan with any information on a score of its citizens kidnapped by North Korea during the 1970s and 1980s. Some of the abductees were schoolchildren on their way home from school. Sure sounds like terror to me. Meanwhile, North Korea has more than a hundred nuclear missiles aimed at the heartland of Japan.

If Japan tells us this issue is of the utmost political sensitivity, we need to listen and not run roughshod over the wishes of a critical ally especially when the deal at hand with North Korea is by most accounts deeply flawed.

Rather, our top priority in the Asia-Pacific region should be to invigorate and dramatically broaden the scope and the intensity of the Japanese-American partnership. With the global war on terror and the rise of India and China, the relative amount of media and Congressional attention paid to relations between Japan and America has dwindled. This is unfortunate since the alliance remains as former U.S. Ambassador to Japan Michael Mansfield aptly put it: “the most important bilateral relationship - bar none”.

This statement is even more on the mark today given the wide range of issues that the robust partnership can tackle more effectively together. From regional trade issues, to fighting poverty, to making multilateral institutions more effective, to seeking more transparency and cooperation regarding regional security issues; the vital interests of both countries and the region as a whole largely coincide.
Here are just a few of the issues that need attention, publicity and action.

1) Japan deserves our unequivocal and full backing to be a permanent member of the United Nations Security Council. The window of opportunity for getting this accomplished is closing fast.

2) The need to rapidly expand the current joint effort to fund and upgrade technologies regarding missile defense.

3) With the U.S. defense budget under acute pressure and Japan’s navy now more than three times the size of the UK’s, it makes sense for both countries to escalate cooperation to maintain a strong deterrence in the region. The bickering and acrimony over our bases in Okinawa also need to be resolved quickly.

4) Establish a free trade zone between the two countries. China is now Japan’s largest trading partner but the complementary nature of America’s and Japan’s economies is an important consideration. In addition, China is rapidly moving up the technology ladder and over time will manufacture domestically rather than import from Japan.

5) Encourage closer cooperation over yen/U.S. dollar exchange rates could avoid sudden and disruptive movements and allow a steady and orderly increase of the undervalued yen.

6) Jointly fund and manage economic development, conservation projects and humanitarian efforts in the region. Both countries are generous donors to the region and have the infrastructure to act quickly on a large scale.

The issue of North Korean abductees is just as important to Japan as the issue of the MIA-POW issue was to our relations with Vietnam. We need to stand firm with Japan on this one, no matter what the short-term costs. The people of Japan are watching whether our words match our actions. Freedom is not a bargaining chip, it is at the very heart of our nation’s foreign policy.

The mission of the Center for American Diplomacy is to change priorities with more focus on the Asia-Pacific region and emerging market countries.

How Will Stronger Yen Affect Japan ETFs?

By Carl Delfeld of the Chartwell ETF Advisor

As markets brace for interest rate decisions by both the Bank of England and the European Central Bank, Japan's central bank will also at some point have to increase benchmark rates. How will this affect Japan exchange-traded funds like iShares MSCI Japan (EWJ) and iShares S&P/TOPIX 150 (ITF)?

Bank of Japan Governor, Toshihiko Fukui, recently said that his bank is committed to gradually raising the county's "very low" borrowing costs to prevent investment bubbles. Fukui said "Keeping interest rates lower than the economy's strength is risky and they need to be raised in a timely manner." Fukui's comments are consistent with other policy members sentiment on the BOJ as the policy minutes from the Sep 18-19 BOJ meeting were released today. Some of the 9 board members stated that a "long period" of global monetary easing had led to "excessive financial behavior" that resulted in the US home loan crisis.

The Bank of Japan is concerned that keeping its benchmark rate at 0.50% risks seeding future asset bubbles as well as furthering the carry trade but are also concerned on how global financial market instability and the US economy will affect their outlook for Japan's growth and inflation. In other words, rates need to go up but policy maker s are fearful of slowing an already fragile economy.

Bumping the benchmark rate to 0.75% would be a wise move and would surely strengthen the yen while exporting oriented company shares would initially take a hit. The Japanese market overall would rise.

Japan still represents 40% of the MSCI index. What Japan allocation belongs in your portfolio? Join the Chartwell ETF Advisor to find out.

Japan Economic Update

By Asian Specialist Matthews Funds

In general, the Japanese stock market has not performed well this year. A number of questions loom over the economy: With no sign of inflation, will an almost zero percent interest rate continue for the foreseeable future? Where is the job market heading?

In truth, the Japanese economy has been steadily expanding since February 2002-- the longest expansion since 1945. GDP in 2007 is expected to grow 1.7% in the absence of domestic consumption; this anticipated growth is largely due to healthy corporate capital expenditures and rising exports to Europe and Asia.

Over 1,700 companies listed on the first section of the Tokyo Stock Exchange reported a 16.1% increase in recurring profit growth for the quarter ended June 30 compared to the prior year. Additionally, forecasts for recurring profit growth for the current fiscal year have increased from 7% in July to 9.7% at present.

Recent economic data suggests that the economy remains reasonably healthy: August industrial production rose 3.8% from July; household spending and retail sales were up 1.6%; the total number of jobless is at 21-month low. Importantly, some large companies have begun recruiting students who won't graduate until April 2009. Employment of new college graduates lagged in the nineties. However, the fact that employers are now recruiting two years in advance is a remarkable shift, reflecting the fact that there are two open jobs for every college graduate.

Regarding inflation, beginning this fall the price of many essential consumer products will increase for the first time in 17 years, including Cup Noodles (a Japanese staple), mayonnaise and toilet paper. The impact of these price hikes may result in a positive CPI number next year. However, consumers are already sensing signs of inflation in Japan, which in turn may lead the Bank of Japan (BOJ) to announce a much-watched rate hike sooner than expected.

Sources: Toyo Keizai, Wall Street Journal, Bank of Japan, CLSA Research

Comment by Carl Delfeld of the Chartwell ETF
Advisor

The largest Japan exchange-traded fund, MSCI iShares Japan (EWJ) is up only 2.4% so far this year. This is a far cry from its Asian competitors such as China (FXI), up 76.7%, South Korea (EWY), up 43.7%, and Australia (EWA) and Singapore (EWS), both up 40% this year. Expectations are so low regarding Japan that we may see a rebound but I doubt it will be before 2008. Japan still represents 40% of Asian market value so key this year is to underweight Japan in global portfolios. Chartwell ETFs Asian Opportunity has underweighted Japan for some time. Another option for investors is to key in on Japanese yen through Rydex Japanese Yen ETF (FXY).

The key to Japanese economy is a more confident Japanese consumer. Even Toyota is seeing very week auto purchasing in its home market. Demographics is also a weak point with Japanese population projected to decline 20% by 2050.

Citigroup's Smart Japan Strategy

By Carl Delfeld of the Chartwell ETF Advisor

Let's face it - the news about Citigroup these past several weeks has been dismal - negatively impacting its stock and the exchange-traded funds like the iShares Global Financials (IXG) that that has the bank as one of its top holdings.

But the Chartwell Global 30 added Citigroup to its holdings of thirty multinationals this week in part because the news cannot get much worse for what was once the premier global bank. If only we could bring back Walter Wriston.

Mr. Chuck Prince, the head of Citigroup (C), is living on borrowed time as he alerted analysts that the American bank's profits for the quarter would plunge by 60% compared with the same period of 2006. Citigroup announced write-downs of $1.4 billion on commitments to leveraged buy-outs, as well as further substantial losses on mortgage-backed securities and fixed-income trading. I am sorry to say that Citigroup stock will soon jump 10% on the day that Mr. Prince jumps with his golden parachute.

Now for some good news. Citigroup's troubles did not stop it from agreeing to take full control of Nikko Cordial, a leading Japanese broker. The acquisition will help position Citigroup for an expected switch by Japanese household savers into higher-yielding assets. This is potentially a huge market.

Japan's postal system is really the world's largest financial institution with assets estimated to exceed $3 trillion representing more than 50% of Japan's GDP. Starting last October, it is to be privatized step by step over the next 10 years. This will move deposits from government accounts to private accounts and perhaps encourage Japanese investors to put more cash to work in stocks rather than leaving so much cash in their accounts.

At the end of September 2006, cash and deposits accounted for 51.3% of total financial assets at Japanese households, while the ratio stood at only 13.3% at the U.S. households. In short, Japan is at the center of Asian growth plus the Japanese have household savings equal to three times its GDP ($12 trillion) – and will need to invest more inequities to meet their retirement needs.

This huge amount of cash sitting on the sidelines is just one more reason not to write off Japanese ETFs such as (EWJ) which are full of world class companies at the heart of Asian and world growth.

Bring Back Koizumi

By Carl Delfeld of the Chartwell ETF Advisor

Japan's ruling Liberal Democratic Party (LDP) needs to bring back former Prime Minister Junichiro Koizumi to keep its grip on power, reinvigorate the Japanese economy, and strengthen its alliance with America. The LDP will hold elections next week to find a replacement leader for Mr. Shinzo Abe who stunned his party by resigning as prime minister.

Investors in Japan through exchange-traded funds such as the MSCI iShares Japan ETF (EWJ) should be watching carefully since the next LDP leader will come under sharp scrutiny and pressure to hold a general election that could topple a ruling party that has been the leading power for the past half-century. An election is not constitutionally necessary until September 2009.

Japan, facing slow economic growth and a lack of consumer confidence needs to put an economic reform agenda front and center. This was Mr. Abe’s prime mistake as he shifted to international affairs and nebulous goals such as a “Beautiful Japan”. On the foreign affairs front, the top priority needs to be deepening ties with America including moving towards a free trade zone and accelerating missile defense. It is also vital that Japan continues its operations to refuel allied ships in the Indian Ocean, parliamentary approval for which runs out on November 1. Mr. Ichiro Ozawa, leader of the opposition Democratic Party of Japan, whose party overwhelmed the LDP in July's upper house elections, said his party would continue to oppose an extension of the anti-terrorism bill.

Above all, the Japanese electorate and global investors are looking for a leader of Japan who is creative, confident and a bold reformer.

Koizumi is that leader.

Former Prime Minister Koizumi stunned the political establishment by calling a snap election last September with postal privatization front and center. He then had the audacity to recruit high profile candidates to replace the “obstructionists”.

Why is the post office system so important? It is a blend of economics, politics and symbolism. With $3 trillion of assets, the 134-year-old postal system is a huge economic force and by privatizing it Koizumi hopes to unleash this liquidity, cut the bloated bureaucracy and lead the way to broader market reform. Prime Minister Koizumi was not coy about this stating: “privatization of the post office is the first step toward the reconstruction of Japan’s politics and economy.”

This long overdue confrontation also highlights two realities long known by Japan watchers but ignored by the mass media. The first is that Japan is to a great degree a socialistic country – in fact one of the few socialistic countries that have worked. Mr. Koizumi realizes that it is not working any more and is bent on opening it up and driving market reform. The second truth is that the key to economic reform is political reform and this means reducing the LDP’s reliance on rural areas and making it more relevant to younger urban voters.

What does this all mean for global investors in Japan? Japan’s economy is showing signs that its fragile recovery after a long period of deflation and weak growth is at risk. While real estate prices rose in Tokyo last year for the first time in 14 years, corporate spending is slowing and a stronger yen is hurting exports. The most important missing link is vigorous consumer spending which is at best lackluster.

Japan is a rich country holding on to 40% of the world’s $12 trillion in savings but lacks the confidence to act like it. Let’s bring Mr. Koizumi back to unlock Japan’s potential for higher economic growth and prosperity.

For more information about investing in markets like Japan, go to the Chartwell Advisor

More Bad Economic News for Japan ETF

Japan's market and exchange-traded funds that track it such as (EWJ) have suffered through continued weak economic growth were dealt a further setback as GDP revisions slipped into red figures.

Japan’s economy shrank more sharply than expected in the second quarter, with revised gross domestic product data released on Monday showing an annualised contraction of 1.2 per cent according to the Financial Times. Economists were expecting a downward revision following evidence last week that capital spending, a big driver of growth, had slowed sharply.

The only bright spot was core machinery orders, a highly volatile figure regarded as a leading gauge of capital spending, rose 17.0 per cent in July from June, government data showed. That was far above economists’ median forecast for a 5.3 per cent increase.

JPMorgan has recently revised down its estimate for annual growth in the year to end-March 2007 from above 2 per cent to 1.6 per cent. It now expects the central bank to refrain from a rate rise until next year.

Political news is also a bit discouraging as Japan's Prime Minister, fresh from the APEC meeting in Australia, spoke on Monday to parliament in an attempt to re-position his agenda and stage a comeback from the hit to the influence and prestige of the ruling Liberal Democratic Party which lost control in Upper House elections in July.

Mr. Abe said it was vital Japan continued its operations to refuel allied ships in the Indian Ocean, parliamentary approval for which runs out on November 1. Addressing a threat from the opposition Democratic Party of Japan to oppose extension of the so-called special anti-terror law, he said: “I hope to deepen constructive discussions with the opposition parties.”

This is an extremely important issue for Japan-U.S. relations.

By Carl Delfeld of the Chartwell ETF Advisor

Japan ETF and Yen Up Despite Crushing LDP Defeat

The largest Japan exchange-traded fund (EWJ) and the Rydex Yen ETF (FXY) were both up this morning despite Japan's ruling party's crushing defeat in upper house elections.

The ruling coalition suffered a 30-seat swing to the opposition and lost its majority. For his party, the Liberal Democrats, it was one of its worst defeats, with just 37 seats won out of 121 up for grabs.

Japan's Prime Minister Shintaro Abe, who took power only ten months ago, rejected calls to step down. The Financial Times notes that the the main opposition Democratic Party of Japan will wish to assert its agenda and reverse Abe's focus on reducing Japan's net public sector debt which is 98 per cent of gross domestic product.

My view is that this kick in the pants may be a good thing for the LDP forcing it to pull back from too much emphasis on foreign policy and making Japan a "beautiful country" and re-invigorate the Japanese economy so that consumer confidence and spending get a kickstart.

By Carl Delfeld of the Chartwell ETF Advisor

Japanese Market and ETF Steady Despite Earthquakes

The Japanese stock market and exchange-traded funds that track them such as (EWJ) did not see any significant fallout from the two earthquakes that occurred in the past 2 days in Japan. Tokyo Electric Power Co announced today that it found a second leak at its nuclear power plant that was hit by an earthquake yesterday but the company said the leak was very minor. The plant found its first leak yesterday soon after the earthquake where some radioactive water escaped into the sea but apparently did not threaten humans.

Barchart reports that Asian stocks today closed mixed. China closed +2.48% and Hong Kong up +0.45%, but Japan closed -0.12% and Singapore -0.06%. I noticed that the Korean market has pulled back a bit dragged down by 5% decline in Samsung and weakness in Kookmin bank. European stocks are showing a moderate loss of -0.64% this morning on oil company downgrades and lower mining companies due to a decline in metal prices.

In other news this morning, Dow Jones is up 1.8% in European trading this morning on a report in the Wall Street Journal that Dow Jones and News Corp have reached a tentative deal for News Corp to acquire the company. The report said that the Dow board will meet tonight to review the offer.

Posted by Carl Delfeld of the Chartwell ETF Advisor

Japan Holds Rates Steady, South Korea Hikes

The Bank of Japan earlier today announced that it left its overnight rate unchanged at 0.50%, which was in line with most market analyst predictions. It will also perpetuate the robust carry trade which has kept the yen weak. The market is not expecting a rate hike until later this year and not until inflation starts to rise and the risks for deflation recede.

Meanwhile, the trend toward higher global rates was underlined again earlier today when South Korea's central bank raised its benchmark rate by 25 bp to 4.75%. The market had been split regarding the this rate hike which will tighten the money supply and credit growth. Higher housing prices and a stronger than expected economy and stock market tracked by the exchange-traded fund (EWY) gave monetary officials the leeway to raise rates without fear of killing economic momentum and growth. Markets have responded favorably with EWY up 2.5% in midday trading while the iShares Japan ETF (EWJ) is flat.

My view is that Japan should have followed Korea and raised rates and that higher rates would be good for its economy and stockmarket. It would demonstrate confidence in the Japanese economy which is sorely lacking by officials, executives and consumers.

Overseas stocks markets today were mostly higher, except for the Nikkei index which closed down slightly. China's Shanghai Composite closed +0.71% and Hong Kong closed +0.89%. The European DJ Stoxx 50 index this morning is just barely higher.

Posted by Carl Delfeld of the Chartwell ETF Advisor

Vanguard Pacific Stock ETF (VPL)

VPL continues to move higher in value as it maintains its demand status in a column of X's. Japan's industrialized, free-market economy is the world's third-largest purchasing power parity (PPP) after the United States and the People's Republic of China.

By DE Smith of MyPortfolioView

Foreign ETF Investors Increase Stake in Japan

The Japanese market and exchange-traded funds that track them had great years in 2003, 2004 and 2005 but many of the gains were fueled by foreign investors.

Overseas investors have raised their share of corporate Japan to a record high, hoping that its weak stock market will come alive and prospects that more foreign share ownership might shake up corporate Japan.

David Turner of the Financial Times writes that international investors increased their stake in the stock market to 28 per cent in March from just over 26 per cent in 2006 and only 4.7 per cent in 1990, according to figures released by the Tokyo Stock Exchange and four smaller Japanese bourses.

Patrick Mohr, director of equity research at Nikko Citigroup, said foreigners had bought Japanese shares because of hopes about a consumer-led economic recovery, a rise in the prices companies can charge, and the prospects of shareholder activism. “It may be only the third one – expectations for activism – that shows any sign of igniting”.

Another advatage of investing in Japan is its low correlation to the S&P 500 index. Over the past five years it has been only 29%.

Posted by Carl Delfeld of the Chartwell ETF Advisor

Vanguard Pacific Stock ETF (VPL)

The top ten positions of Vanguards Pacific ETF make up 18.2% of the exchange traded fund. VPL is diversified between four key countries: 1) Japan 70.10%; 2) Australia 20.20%; 3) Hong Kong 5.60%; 4) Singapore 3.60%; 4) New Zealand 0.50%.

By DE Smith of MyPortfolioView

Could Japan ETF Follow Germany

The German exchange-traded fund (EWG) has performed well in part due to an improvement in German growth and higher consumer spending. Japan's ETFs such as EWJ have been a bit of a disappointment as the Japanese economy faces similar challenges. A friend and sharp global investment advisor recently returned from a week in Japan with these comments.

To summarize, Japanese assets are cheap, but they could be a value trap and stay cheap for a while. However, if things get better, then ultimately the assets will get revalued. When they move, they are likely to move very fast as liquidity is quite limited.

The main problem is that foreigners are the only buyers. Demographics means that there is not a large cash flow into pension funds. Retail investors were all scared off after the insider trading scandal, and M&A activity is still difficult.

Foreigners are beginning to give up on Japan and chase the hotter markets of Europe and the US to a lesser extent. Asian funds are concentrating on China beneficiaries. Private equity and takeovers are happening where the barriers are lower even though leveraged buyouts with 2% interest rates and pretty strong balance sheets of the potential takeovers would seem to be pretty attractive. Thus, it is not obvious where the catalyst is for a turnaround.

However, the economy is doing better than OK, multiples are coming down (although ROE is still low) and things are progressing. I would argue that the demographics are probably in the price unlike say Germany. In fact, someone argued that a rise in interest rates would help consumption due to the large level of savings in cash accounts.

The corporate sector has behaved a bit like that in Germany: invested overseas in cheap areas (China,Thailand) and screwed down wages and benefits at home. At some stage, things stop getting worse for the consumer, and then there will be a gradual turnaround (as has happened in Germany).

My conclusion is that Japan will be defensive-it will underperform rising markets as foreigners chase them. In falling markets-helped by a weak yen which could recover if the carry trade unravels-it will prove more defensive.

Posted by Carl Delfeld of the Chartwell ETF Advisor

Weak Yen Helps Japan ETF Stay Steady in China Storm

The Japanese market and exchange-traded funds ignored the turmoil in China and churned ahead propelled in part by a weaker yen.

Japan’s Nikkei 225 index closed above 18,000 for the first time in three months. Nippon Oil Corp, the country’s biggest oil distributor, advanced 3.8 per cent to Y1,112 and Toyota Motor, the world’s biggest carmaker by unit sales, rose 0.9 per cent to Y7,620. A weaker yen continues to help the profits of the big exporters. It is interesting to note that Toyota builds more cars outside of Japan than at home.

But the weaker Japanese yen while helping Japanese exporters in the ETF basket also hurts US investors in Japanese ETFs such as (EWJ) that tracks the MSCI Japan index since they are dollar based. The iShares: MSCI Japan topped the list at midday on Wednesday for the buying on weakness formula, which tracks stocks that fell in price but had the largest inflow of money.

Australia’s dollar hit a 15-year high against the yen, as strong economic activity and soaring commodity prices added to inflationary pressures and currency climbed 0.5 per cent against the yen to Y102.02.
The New Zealand dollar, also boosted by domestic growth and interest rate expectations, rose 0.9 per cent to a 16.5-year high of Y91.61. The euro hit a record high of Y164.61 against the yen, while sterling extended its 15-year high to Y242.99.

The yen is perhaps the most undervalued currency on the planet and there are rumors that Warren Buffet may be going long the currency. If interest rates in Japan move up sharply, it will have a substantial impact on the yen as well as Japanese and southeast Asian markets.

By Carl Delfeld of the Chartwell ETF Advisor

Japanese Stockmarket and ETFs Losing Ground to Rivals

As Japan exchange-traded funds such as (EWJ) struggle to compete with the performance of countries like Singapore (EWS) and Hong Kong (EWH), its once dominant stock market also has lost tremendous ground to its rivals.

Tokyo still has the second-largest stock market after New York and is by far the largest financial centre in Asia, with a stock market capitalisation of $4,614bn compared with $1,715bn for Hong Kong and about $384bn for Singapore. The combined value of the Shanghai and Shenzhen markets have also recently exceeded that of Hong Kong. But even as other economies have seen their capital markets surge since 1990, such growth in Japan has been anaemic. Having comprised a third of global market capitalisation in 1990, Japan’s market capitalisation is now less than one-tenth that of the world’s $49,900bn.

Michiyo Nakamoto of the Financial Times goes on to say that in a stark sign of Tokyo’s decline, the number of foreign companies listed on the Tokyo Stock Exchange has plummeted from 125 in 1990 to just 25. That is a fraction of the 446 foreign listings in New York, the 315 in London and the 150 in Singapore. New funds and innovative products are also looking at other markets that are more open to growth.

As much as I want to believe that Japan and Japanese markets have turned the corner, all of this seems to highlight a lack of confidence and risk taking so vital to growth in financial services.

By Carl Delfeld of the Chartwell ETF Advisor

Delfeld on Japan and ETFs

Earlier this year, I did a couple of interviews with the World Money Show on prospects for Japan and ETF choices for those who would like to invest in Japan. You can hear these now by clicking on the titles below.

The first segment, "The Best Japanese Bets for 2000", is on where the Japanese economy and market are headed and your ETF options.

The second segment, "Japan's Reawakening", describes how the economy has recovered and what are the key issues to watch going forward.

By Carl Delfeld of the Chartwell ETF Advisor

China and Japan ETF

Long-term, both the China exchange-traded fund (FXI) and Japan ETFs such as (EWJ) will be affected by how these two giants get along politically and economically. Japan's economic recovery has been in large part due to its growing exports to China and China is still somewhat dependent on Japanese capital and technology.

The Economist looks at the current thawing of relations between the countries but points out that deeply held historical animosities will take a long time to thaw. Conflict over energy sources in the East China Sea could be particulary explosive. But there is movement towards better relations with Japan's Prime Minister Abe pledging not to visit Yasukuni Shrine and China's Premier Wen Jiabao will make the first visit to Tokyo and Kyoto on April 11th-13th in more than six years.

By Carl Delfeld of the Chartwell ETF Advisor

How Will a Stronger Yen Affect Japan ETFs?

How will a stronger yen affect Japanese exchange-traded funds or ETFs such as (EWJ)?

In my recent Forbes column on Japan, I mention that the yen is perhaps the world's most undervalued currency. It is even cheaper than the Chinese yuan by some measures. Two weeks ago, the Japanese currency hit an all-time low against the euro (down 15% in the last year) and its real trade-weighted value fell to its lowest since at least 1970, according to an index tracked by JPMorgan.

But Japan’s currency has already gained almost 3 per cent this week, the biggest increase since late 2005, and was at 117.66 against the dollar in late trading in Tokyo on Friday. On Thursday, the yen reached 116.97 against the dollar, the highest since December 13, after rebounding from a four-year low of 122.19 at the end of January this year.

This stronger yen has led to weaker equity markets because it hurts large Japanese exporters and exports have been the key impetus behind Japan's stronger economic growth. A stronger yen also means that the foreign revenue from companies like Toyota will appear in financial reports as weaker when say dollar numbers are translated into yen for reporting purposes. But for Japan ETF investors, a stronger yen will somewhat offset these negatives since the ETFs are unhedged meaning a stronger yen will help returns.

Investors looking for a more direct play on the yen can look at the new Rydex Japanese Yen ETF (FXY) which is up 0.6% today.

By Carl Delfeld of the Chartwell ETF Advisor

Japan Post Privatization Could Boost ETF

Japan's postal system is really the world's largest financial institution with assets estimated to exceed $3 trillion representing more than 50% of Japan's GDP. Starting this October, it will be privatized step by step over the next 10 years. This will move deposits from government accounts to private accounts and perhaps encourage Japanese investors to put more cash to work in stocks rather than leaving so much cash in their accounts. Roughly 53% of Japan's household assets are now in cash and deposits compared to 11% for American households.

This huge amount of cash sitting on the sidelines is just one more reason not to write off Japanese ETFs such as (EWJ) which are full of world class companies at the heart of Asian and world growth.

By Carl Delfeld of the Chartwell ETF Advisor

Japan - India ETF Travels

An article in the Economist acknowledges that Japan, hanging on the far edge of Asia, and India, way off almost to the western edge, have had little contact with one another. Shinzo Abe, as Japan’s prime minister, is keen to change that, proclaiming a great new partnership between Japan and India that will bring together Asia’s two great democracies as part of an “arc of freedom and prosperity”.

I think though that the thinking that Japan is at the edge of Asia misses the mark entirely, especially in terms of investment potential. Where Japan is geographically is not the point, its companies are active throughout Asia and are at the heart of Asian economic growth. About 10,000 Japanese companies are active in China and Japanese multinationals that make up much of the most widely traded Japan exchange-traded fund or ETF (WSJ) have deep tentacles throughout South East Asia.

To a degree the same goes for India and the India closed-ended ETF (IIF) and the exchange-traded note or ETN (INP). INP's largest two holdings, Infosys Technologies and Reliance Industries make up more than 25% of its basket and both companies make more money outside of India than within it.

Don't be fooled by geography - follow the money and the companies.

If you would like a first hand look at the potential of Japanese companies and and Japan, why not join Chartwell's investment tour of Tokyo. Nagoya and Kyoto in May 2007.

By Carl Delfeld of the Chartwell ETF Advisor

Will Japan ETFs Follow the Toyota Way

For many Japan ETFs such as (EWJ), the largest holding is Toyota (TM) which is steadily gaining global market share.

But as Martin Fackler of the New York Times points out, far from resting on its accomplishments, Toyota is sharpening its game to meet even larger challenges, including raising quality in the face of rapid overseas expansion and its largest recalls in history.

The nerve center for that task is in the lakeside town of Mikkabi, an hour away from the humble-looking headquarters of Toyota, in Toyota City. It is the Toyota Institute, charged with preparing executives to enter the leadership class at Toyota by inculcating in them some of the most prized management secrets in corporate Japan.

If you would like to have a first hand look at Toyota, why not join Carl Delfeld of the Chartwell ETF Advisor as he leads a small group of individual investors on an investment tour of Tokyo, Nagoya and Kyoto in May 2007. In addition to Toyota, the group will visit, Kyocera, Honda, Sharp, the Tokyo Stock Exchange, the Ministry of Finance,  Nomura and many other historical and cultural site in Japan.

Japan ETFs Get Boost From GDP Report

The long awaited GDP numbers for Japan's fourth quarter reported by the Financial Times boosted both Japan ETFs like (EWJ) and the Japanese yen this morning.

Expectations that the Bank of Japan would soon raise interest rates strengthened on Thursday after fourth-quarter gross domestic product figures showed the Japanese economy grew at its fastest pace in nearly three years.

The Japanese economy in the October to December period grew 1.2 per cent from the previous quarter, much stronger than a consensus forecast of a 0.9 per cent increase. It translated to an annualised 4.8 per cent growth, the highest in nearly three years.

The yen reacted strongly to the data, rising immediately to Y119 to the dollar and Y157.74 to the euro before settling back somewhat. The figures also boosted Japanese stocks, sending the Nikkei 225 average towards a fresh seven-year high.

Japan ETF Could Move With Cash

Japanese ETFs such as the iShares Japan (EWJ) which tracks MSCI Japan index and the broader iShares JapanTOPIX ETF (ITF) may be in for some nice returns if Japanese start being buyers of equities to meet retirement needs. According to a preliminary report by Japan’s Central Bank analyzed by Jiji Press, outstanding financial assets at households as of the end of September 2006 totaled 1,495 trillion yen.

Of them, the balance of cash and deposits decreased 0.8 pct from a year before to 767 trillion yen. In contrast, investment trusts jumped 33.6 pct to a record 60 trillion yen and Japanese government bonds grew 20.2 pct to 30 trillion yen, also a new record. Equity shares held by households also grew 11.6 pct to 159 trillion yen. At the end of September 2006, cash and deposits accounted for 51.3 pct of total financial assets at Japanese households, while the ratio stood at only 13.3 pct at the U.S. households. In short, Japan is at the center of Asian growth plus the Japanese have household savings equal to three times its GDP ($12 trillion) – and will need to invest more inequities to meet their retirement needs. The Japan ETF (EWJ) which tracks the MSCI Japan index was up 35.5% in 2003, 14.8% in 2004 and 24.7% in 2005 before taking a breather in 2006 with a return of 5.5%.

The nation’s current economic expansion was stretched to a 59th month in December to become the longest in the postwar period, eclipsing the 57-month “Izanagi” boom that lasted from 1965 to 1970. Keep in mind that although Japan’s real growth rate going forward will probably be in the 2-3% range this generates new wealth of $300 billion per year.  Since its economic recovery, Japan has been a great place to invest.

Don't Overlook Japan ETFs

By Carl Delfeld of the Chartwell ETF Advisor

Many are advising that Japan funds or exchange-traded funds (ETFs) such as (EWJ) should make up 6 to 10 per cent of most equity portfolios.

Kevin O’Donnell of the Financial Times reports that Japan remains a major world market unlike any other. For one thing, it is far below its peak of the late 1980s. The Nikkei 225 soared to its all-time high of 38,915.87 points on December 29, 1989. Ten years ago it was hovering at 21,000. In early 2003 it dropped as low as 7,600. Today it has recovered to over 17,500.

Japan still trades on a premium to other major markets. At the end of 2006, the Nikkei 225 was on a price/earnings ratio of 21.5, compared to just over 14 for the FTSE All Share and around 18 for the S&P 500, America’s index of largest companies. The consensus is that the Japanese economy will continue growing at a steady space and the chance of a stronger yen could also boost returns for global ETF investors.

Timing Right for New Yen ETF

Jesse Emspak of the IBD reports that Rydex Investments has launched a Japanese yen exchange-traded fund or ETF (FXY), the latest of eight that the firm offers to advisers. The other ETFs offered track the euro (FXE), the British pound (FXB), Swiss franc (FXF), Swedish krona (FXS), Mexican peso (FXM) and Canadian (FXC) and Australian dollars (FXA). Rydex also offers a mixed foreign currency ETF. All of the currency ETFs invest via demand deposit accounts.

Japanese interest rates are still low very low relative to Europe and America with the Bank of Japan rate at about 0.25% and 10-year notes at 1.7%. Chartwell ETF Advisors expects that the benchmark rate will increase to 0.50% in March.

Any rebound in the Japanese economy could strengthen the yen and an announcement is expected next week that GDP growth in the 4^th quarter of 2006 was a surprising 3.5%.

Japan ETF's Yen Problem

I just returned from the World Money Show where I did several interviews on the Japanese market. I certainly agree with the Economist that the yen is perhaps the world's most undervalued currency. It is even cheaper than the Chinese yuan by some measures. Last week the Japanese currency hit an all-time low against the euro (down 15% in the last year) and its real trade-weighted value fell to its lowest since at least 1970, according to an index tracked by JPMorgan. This weak yen has helped Japanese exporters but not investors in Japanese ETFs such as (EWJ). But do not expect the G7 finance ministers and central bankers meeting in Germany

this weekend to do much about it.

The Economist article points out that American and European policymakers do not see eye to eye on the yen. The Europeans would like some action to push up the currency, which, they say, is not bearing its fair share of the dollar's decline. In its latest update, the Economist's Big Mac index suggests that the yen is a massive 40% undervalued against the euro.