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Guide To Investing In Japanese Indexes And ETFs

Japan is the best-performing Asian market for 2023.

A new dawn has broken for the Japanese stock market, with the Nikkei Stock Average posting a 28% gain and becoming Asia’s best-performing market for 2023. After three decades of deflation, Japan is now witnessing a swift resurgence in both prices and wages as a result of favourable market and regulatory conditions, as well as the interests from high-profile investors like Warren Buffett.

As the 4th largest economy by Gross Domestic Product (GDP), Japan is not only a developed market, but it is also home to a large number of well-known global brands. Some notable companies include automobile manufacturer Toyota Motors (TSE: 7203), consumer electronics giant Sony (TSE: 6758), and one of the largest banking institutions, Mitsubishi UJF Financial (TSE: 8306).

For investors, this revitalised Japanese market presents new opportunities for growth and diversification. Here’s what you need to know about investing in the Japanese market.

Why Invest In The Japan Stock Market?

Beyond our local market, we may invest in one or two other larger overseas markets like the US or China for more exposure to global trends and opportunities. However, tense foreign trade relations and political risks may affect our returns, particularly given the close correlation between the two major economies.

That’s where Japan could play an important proxy role for investors who seek exposure to a developed market in Asia. It has a diversified range of businesses, with many being exporters benefiting from the Japanese yen trading at an all-time low against the US dollar.

It has a technology-intensive economy, with a World No 1 ranking in research and development capabilities based on R&D expenditures as a percentage of GDP. Japan also has a highly educated workforce, with 62% of the population having tertiary education. The country has a high proportion of technicians and associate professionals to its total workforce.

In addition to these factors, other catalysts that are boosting the Japanese stock market are the Japan Exchange’s new requirements on companies to maintain listed status. It includes imposing minimum levels of free float and requiring companies trading below their book value to share their capital improvement plans.

Furthermore, from January 2024, the Nippon Individual Savings Account (NISA), a Japanese government tax-free stock investment programme, is being revamped to allow individuals to invest up to 2.4 million yen per year (up from the initial general NISA limit of 1.2 million yen). Additionally, the tax advantage for the growth accounts was also made permanent, which were previously only exempt from taxes for 5 years. These factors have boosted the investment flow into Japanese stocks in recent times.

Read Also: 9 ETFs You Can Invest For Exposure To The China/Hong Kong Market

What Are The Popular Japanese Stock Indices? 

The Japanese stock market is represented by the Tokyo Stock Exchange (TSE), which in turn is owned by the Japan Exchange Group. It was formed in January 2013 with the merger of the Tokyo Stock Exchange (TSE) and the Osaka Securities Exchange.

Founded in 1879, the Tokyo Stock Exchange is the largest stock exchange in Japan and the third largest in the world. It comprises around 4,000 listed companies with a total market capitalization of 931 trillion yen ($8.4 trillion).

From 4 April 2022, the listed companies in Tokyo Stock Exchange are categorized into the three following market segments:

– Prime Market: For companies with large market capitalisation (liquidity) investable to many institutional investors, a high quality of corporate governance, and commitment to sustainable growth through constructive dialogue with investors.

– Standard Market: For companies with a base-line standard level of market cap appropriate as a public company, basic corporate governance standards as a listed company, and commitment to sustainable growth.

– Growth Market: For companies with a reasonable business plan to realise their high growth potential with progress to be timely disclosed, a certain level of market value, a relatively higher risk from a business performance viewpoint.

The main indices that are used to track the performance of the Japanese stock market are:

Nikkei 225

The Nikkei Stock Average (or Nikkei 225) is the global benchmark index that is used to measure the performance of the Japanese stock market. It has been used for more than 70 years, since 1950 and represents the history of the Japanese economy after World War II.

Unlike many other market capitalization-weighted indices, the Nikkei 225 is a price-weighted equity index like the Dow Jones Industrial Average. It is calculated by dividing the sum of the prices of each stock in the Index, which consists of 225 top blue-chip stocks listed in the Prime Market of the TSE.

Tokyo Stock Price Index (TOPIX)

Another important Japanese stock market index is the Tokyo Stock Price Index (TOPIX), established in 1968. It is a free-float adjusted market capitalization-weighted index consisting of most companies in the Prime Market and some companies in the Standard Market.

Due to more than 1,700 constituents making up the TOPIX, it is considered as a broad benchmark of the overall trend of the Japanese stock market than the Nikkei 225.

Popular ETFs With Exposure To Japan

While it is not possible to directly purchase an index, there are several exchange-traded funds (ETFs) that mimic the performance of these indices by investing in the same component stocks listed on the TSE.

Here are some of the popular ETFs listed on the US and Singapore stock exchanges that you can invest in to get exposure to the Japanese recovery story.

Read Also: Complete Guide To ETF investing in Singapore

#1 Lion-Nomura Japan Active ETF (Powered by AI) [SGX: JJJ (SGD); JUS (USD)]

The Lion-Nomura Japan Active ETF is not only Singapore’s first actively managed ETF but also the first AI-powered ETF.

It references to the TOPIX, and uses its proprietary AI models to evaluate hundreds of factors in order to select a final portfolio of between 50 and 100 quality Japanese stocks diversified across sectors and market capitalisation. The recently SGX-listed ETF has a management fee of 0.7% per annum (p.a.).

For Singapore investors, the Lion-Nomura Japan Active ETF can be invested using cash or Supplementary Retirement Scheme (SRS) funds. Furthermore, the fund trades in both Singapore dollars (SGD) and US dollars (USD), making it convenient for investors who wish to avoid currency conversions.

Read Also: 5 Things You Need To Know Before Investing In The Lion-Nomura Japan Active ETF (Powered by AI)

#2 iShares MSCI Japan ETF (NYSE: EWJ)

Outside of Singapore, investors can also trade in the Japanese ETFs listed on US stock exchanges. One of the biggest and most liquid Japanese ETFs is the iShares MSCI Japan ETF, traded on the NYSE.

Listed since 1996, the iShares MSCI Japan ETF aims to track the investment results of the MSCI Japan Index, which measures the performance of large- and mid-sized Japanese equities.

The fund which has a market capitalisation of around US$15 billion, holds a portfolio of 225 companies, such as Mitsubishi UFJ Financial, Tokyo Electron, and Hitachi. It has a management fee of 0.5% p.a.

#3 WisdomTree Japan Hedged Equity Fund (NYSE: DXJ)

The WisdomTree Japan Hedged Equity Fund offers broad equity exposure to Japanese dividend-paying companies while neutralising currency fluctuations of the Japanese yen relative to the US dollar.

The fund, which has a market capitalisation of around US$4 billion, holds a portfolio of 447 companies, such as Japan Tobacco, Sumitomo Mitsui Financial, and Takeda Pharmaceutical. The fund has a dividend yield of 2.72% (as of 5 February 2024) that may be subjected to a withholding tax and a management fee of 0.48%.

#4 Franklin FTSE Japan ETF (NYSE: FLJP)

Another alternative that you can consider within the NYSE is the Franklin FTSE Japan ETF, which has been listed since February 2017.

The Franklin FTSE Japan ETF aims to track the performance of the FTSE Japan RIC Capped Index (the FTSE Japan Capped Index), which is a market-capitalisation-weighted index representing the Japanese large and mid-capitalisation stocks.

The fund has a market capitalisation of US$1.7 billion and holds a portfolio of 512 companies, such as Toyota Motor and Keyence, as of January 2024. It has an expense ratio of 0.09% p.a., which is among the lowest for Japanese ETFs.

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