Abenomics bets on Japanese ETFs

In 2013, the two top-selling ETFs both invest in Japan.

May 16, 2013

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Japan Lucky CatsAfter years of languishing in the shadows of global finance, Japan is getting ready for its comeback close-up. At least that’s what investors are hoping for as they respond to Prime Minister Shinzo Abe’s attempts to pump some life into Japan’s economy with a US$1.4 trillion whack of stimulus. Skeptics are worried that the potential benefits of “Abenomics,” as it’s come to be known, are short term and could lead instead to inflation, asset bubbles and a weaker yen. But investors are taking this opportunity to push money into Japanese stocks via exchange-traded funds (ETFs).

So far, in 2013, the two top-selling ETFs both invest in Japan—the WisdomTree Japan Hedged Equity has attracted $4.8 billion year to date, while iShares MSCI Japan is $3.3 billion fatter since the beginning of the year.

In a conference call last month, BlackRock CEO Larry Fink observed that the surge of Japanese ETFs is really a rebalancing on the part of investors who have been underweight in Japan for years. However, one of the key buyers of Japanese stock ETFs is Japan itself—the Japanese central bank recently said it spent 39.7 billion yen buying up stock ETFs as it continues to purchase assets in an effort to shake the country out of a years-long deflationary funk.

The Bank of Japan is planning to keep on eating its country’s own ETFs over the next two years as it tries to reach a 2% inflation target.

My first thought is that this is yet another interesting example of how ETFs have become a key policy tool for some governments (seeChina) while regulators in other jurisdictions such as the U.S. and Europe continue to voice concerns over the pace of ETF growth.

But the surge of cash into Japan-focused ETFs also shows investors betting on the potential for Abenomics to, at last, turn the Japanese economy around. They are in good company—last week, the Canada Pension Plan Investment Board announced that it’s planning to invest US$403 million in Tokyo office buildings—another sign that the money is ready to flow into Japan and that some investors think the era of deflation is over.

Here’s hoping Abenomics works and that Japan shifts from deflation to inflation. After years of economic bad news, investors, at least, are showing us that this kind of bright spot in the world would be most welcome.

This article first appeared on BenefitsCanada.com.

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