After logging in the biggest weekly drop of 11% in more than seven years on a rising yen, fears of a global slowdown and the sell-off in banks, the Japanese stocks bounced back strongly at the start of this week. Notably, the Nikkei 225 index jumped 7.2% in Monday's trading session, representing the biggest daily gain since September, and extended gains of nearly 0.2% in today's trading session (read: How Sustainable is Nikkei Rebound? Japan ETFs in Focus).
With this gain, the index has reversed the bearish trend it saw last week. Impressive two-day gains came on the back of bargain hunting and hopes for further stimulus from the central banks in Europe and Japan. In particular, renewed contraction in the Japanese economy brought back the need for more easing measures to stimulate the economy.
Additionally, yen has weakened from the highest level of ¥110.98 reached last week against the greenback that will benefit exporters and the manufacturing industry. This is because Japan is primarily an export-oriented economy and a weaker currency makes its exports more competitive.
More Stimulus in the Cards
The economy contracted 1.4% year over year in the final quarter of 2016, worse than the Wall Street expectation of a 1.2% contraction. A drop in consumer spending, weak exports and lower private consumption continued to weigh on the growth of the world's third-largest economy. The persistent slump in Japan's biggest trading partner – China – added to the woes.
The slowdown is the major setback for Prime Minister Shinzo Abe and his reform policy – Abenomics – which is aimed at pulling the country out of deflationary pressure and putting it back on the growth trajectory. Sluggish growth has raised speculation over additional fiscal stimulus by the central bank.
Earlier this month, Bank of Japan (BoJ) adopted measures similar to the European Central Bank (ECB) by pushing the interest rates to the negative territory. Additionally, the central bank maintained its bond-buying program of 80 trillion yen ($675 billion) per year and invested in exchange traded funds and real estate investment trusts. Now, an analyst at J.P. Morgan expects Bank of Japan (BoJ) to cut interest rates further to minus 0.5% from the current minus 0.1% anytime soon plus increase its Japanese government-bond purchases (read: Japan ETFs to Buy on Negative Interest Rates).
Further, many economists expect Japanese growth to rebound in the coming months. As per the survey by the Japan Center for Economic Research, 38 analysts project that the economy would expand by an average of 1.4% in the first quarter, which would mark the best growth in five quarters.
Given this, Japanese ETFs are poised for a rebound, especially in the session right after the Presidents Day holiday in the U.S. As a result, investors could tap the current opportune moment by investing in the Japan ETFs.
ETFs in Focus
