Investing in Japan is easy, but how you do it is key

The re-election of Prime Minister Shinzo Abe is expected to see a continuation of supportive economic policies which benefit the economy. But make your investments with care — the relative strength of the yen still dominates prospective returns.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
Investing in Japan

A combination of domestic events, including increasingly aggressive rhetoric from North Korea (the firing of a missile over Northern Japan being a particularly low point) gave Shinzo Abe the excuse he needed to call an October 2017 election to revise Japan’s pacifist constitution, and consolidate his power for the next four years.

With a two thirds majority, the election result cemented his role as Prime Minister, as well as making it increasingly likely that his expansionary ‘Abenomics’ economic policy that has helped increase stock prices (but with a trade-off of a weaker currency) will continue.

In the chart below, we can see how this has worked in practice. The stock market has been highly correlated with a weakening yen, and there is scant evidence that this trend is breaking down. Indeed, in the days after the vote, the yen fell slightly against major currencies and the stock market reached new highs.

Image 1: Japanese market performance since the election of Shinzo Abe 

What ETFs are available to UK investors?

Exchange traded funds (ETFs) have made investing in the Japanese equity market very easy, as well as low cost. However, Japan’s almost unique currency dynamics make the decision whether to hedge returns or not a significant driver of longer-term returns.

If 'Abenomics' continues, it is expected that the yen will continue to weaken, and therefore a GBP-hedged vehicle may offer better returns. However, if policy changes, and the yen strengthens, then having some currency exposure could protect on the downside.

Here we outline our preferred routes to investing in Japanese assets. All the ETFs below can be bought from just £5 on IG’s share dealing platform. You can check our ETF screener for our full range of ETFs.

iShares Core MSCI Japan IMI UCITS ETF – SJPA

Investors looking for a traditional market cap approach with exposure to the yen should consider this offering from the iShares core range. The MSCI index has exposure to midcap companies too, and the ETF has a low total expense ratio of 0.2%

iShares MSCI Japan Small Cap UCITS ETF – ISJP

It is usually the case that the small cap stock sector performs well in bull markets, but get sold off much harder in bear markets. In this respect, Japan is no different. However, for the more adventurous investor, this ETF could be used as a portion of their allocation. It has a yield of 1.4%, and a total expense ratio of 0.58%.

Db-X-trackers JPX Nikkei 400 UCITS ETF – GBP Hedged - (XDNG)

The Nikkei 400 is quite a new addition to an investor’s universe, having been launched specifically to promote good shareholder values and corporate governance. Each stock is scored on cumulative three year Return on Equity (ROE), cumulative operating profit and market value, and it is hoped that corporates will aspire to being given larger weights as time goes on.

This hedged ETF has a total expense ratio of 0.3%, but investors looking for the unhedged version are well served by the Source JPX-Nikkei 400 (S400) which offers the same exposure but for a slightly cheaper 0.2%. 

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