Japan’s Not Ready for Liftoff

02/04/2009 12:08 pm EST


Tom Lydon

Editor and Publisher, ETF Trends

Tom Lydon, editor of ETF Trends, says Japan’s stimulus efforts haven’t really sparked much enthusiasm for Japanese stocks.

The Japanese government is getting active in their rescue plan to help salvage markets and exchange traded funds (ETFs). Their new stimulus plan is aimed at a $255 billion injection to get their economy up and running again. This second package is being implemented after a previous plan in October, which did not help resuscitate the financial markets.

A weaker yen could help the economy in the long run, as it would reignite exports. Right now, the strong yen is tamping down demand.

Among industrial nations, Japan’s goal is not only to recover from the global recession, but to be the first ones to do so. The new stimulus package also includes tax breaks and public financing projects worth millions of dollars. Japan’s economy is the world’s largest after the United States, and it shrank at a rate of 1.8% annually in the third quarter.

Japan has taken steps toward aiding small and mid-sized companies in their country, as lowered demand has made it harder for the businesses to keep afloat, and this could impact related markets and ETFs.

Last week, the Japanese government outlined a plan that will inject state money into failing companies for an exchange of equity stakes, similar to what has taken place in both Europe and the United States.

The New York Times reported that the announcement by the Trade Ministry is the most recent in a series of efforts taken by the government. Taking these stakes is seen as preferable to waiting for banks to increase lending, something they’ve been skittish about. The plan also includes handouts to taxpayers totaling $22.4 billion.

Over the past few weeks there has been a wave of profit warnings and job losses that have become common during this recession. Recent statistics showed bankruptcies in Japan jumped 24% in December from a year earlier and 33 firms that were listed were struck last year. (Exports also have dropped dramatically—Editor.)

The steps the Japanese government is taking to improve the economy and help out businesses has not pushed iShares MSCI Japan (PCX: EWJ) above its 200-day moving average. We would not recommend buying an ETF until it goes above its long-term trend line. As these policies are implemented and spur economic recovery, we should see EWJ move higher and cross above that mark. Once that happens, it might be worth looking at how EWJ fits into your portfolio.

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