To the Orient

10/06/2006 12:00 am EST

Focus:

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Mutual fund and ETF expert Doug Fabian looks eastward for his latest recommendation. For investors hoping to spread their wings internationally, he finds an exchange-traded fund that is set to reap the rewards of a rebounding Japan.

"My favorite tool to buy the Japanese economy is the iShares MSCI Japan Index Fund (EWJ : AMEX) which seeks to mirror the results of the MSCI Japan index through a representative sample of stocks that are traded primarily on the Tokyo Stock Exchange. The Nikkei average, Japan's largest stock market indicator, endured a 14-year bear market from 1989-2003 - one of the biggest market troughs in history, plunging from 39,000 to 8,000. That would be equivalent to the Industrials sliding from 11,000 to 2,300. The good news is the Nikkei is starting to emerge into a new bull market.

"The well-known Japanese companies owned by EWJ and the percentage of the fund's investment portfolio that those stocks encompass include Toyota Motor, 5.4%; Mitsubishi Tokyo Financial Group, 4.4%; and Mizuho Financial Group, 2.9%. The EWJ investment portfolio also consists of Canon, 1.9%; Honda Motor, 1.8%; and Sony, 1.6%. These companies are known throughout the world for their technological innovation and commitment to manufacturing excellence.

"Japan is especially attractive because it is the world's second-largest economy - trailing only the United States. The large market size makes Japan's economy the engine for other economies in Asia. This engine slowed in the 1990s - following the collapse of Japan's asset-price bubble. However, Japan's economy has revived during the past four years. The country's potential output growth has risen since 2001 to more than 1.5% during 2005, compared with less than 1% at the end of the 1990s. That growth is fueled by gains in manufacturing, real estate, finance and insurance, according to the International Monetary Fund's September 2006 report, called the World Economic Outlook: Financial Systems and Economic Cycles. The same movement of economic growth toward services that has been taking place in the US is also occurring in Japan.

"Another plus for Japan: It is very energy efficient. The country is less dependent on oil than the US and has a huge nuclear energy infrastructure that fuels its economy. The country has limited natural resources, but its people know how to maximize what they do possess. As the world's demand for oil rises, Japan is more insulated than many other industrialized countries to suffering from the ill effects of a lack of energy independence. In contrast, many other industrialized countries will feel the squeeze more than Japan as economically emerging nations such as India and China boost their demand for oil in the future."

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