Japan’s key index Nikkei ended in the positive territory for the first time this year on Wednesday. Nikkei gained 2.9%, or 496.67 points, on Wednesday after losing nearly 1,800 points from the start of this year through Tuesday. Despite hitting the highest year-end close last year in 18 years, the benchmark was struggling to finish in the green from the start of this year following China led global growth worries and the oil price slump.
Reasons Behind the Rebound
Better-than-expected trade data out of China, gains in the U.S. markets and decline in yen’s value against major currencies emerged as the main reasons behind the rebound. The General Administration of Customs reported that Chinese exports declined 1.4% in December, narrower than a 6.8% drop in November and markets’ estimate of an 8% decline. Though imports declined for the 14th consecutive month in December, the 7.6% drop in imports compared favorably with November’s plunge of 8.7% and markets’ forecast of an 11.5% decline (read: Nikkei Hits fresh 15-Year High: 3 Japan ETFs to Buy ).
Meanwhile, modest gains in the U.S. markets on Tuesday also boosted Nikkei. A late rebound in healthcare and technology stocks helped benchmarks to offset a further decline in oil prices . Also, the weaker yen helped the major exporters including large-cap auto companies and tech companies to attract investors as it raised the possibility of an increase in export volumes.
Will It Sustain?
Sustainability of this rebound in the near term will largely depend on some key factors including the condition of the Chinese economy, movement of crude and health of the Japanese economy. Though better-than-expected Chinese trade data boosted the markets on Wednesday, decline in both exports and imports indicate that both global and domestic demand continued to remain weak. Meanwhile, the World Bank recently reduced its outlook for Chinese GDP growth in 2016 by 30 percentage points to 6.7%, below last year’s estimated growth rate of 6.9%. The bank also predicted that the economy may grow at a slower pace of 6.5% over the next two years (read: Forget China; Buy These 3 India ETFs Instead ).
Separately, given the weak outlook for the Chinese economy, which is one of the leading importers of oil, and an already oversupplied market, there is little hope of a recovery in oil prices. Crude is currently trading at a 12-year low with every indication of a slide below $30 per barrel (read: Oil and Energy ETFs That Hit All-Time Lows ).
In this scenario, the Japanese economic environment will play a key role in setting the course of Nikkei in the coming months. Japan opted for several economic stimulus measures last year, which proved to be more effective than the steps taken by China and the Eurozone. The economy rebounded strongly in the third quarter to register a GDP growth rate of 1%, as against second quarter’s contraction of 0.5%.
Meanwhile, the impact of recent modifications in the quantitative easing program by Bank of Japan (BOJ) will also remain in focus. The bank opted for raising the Japanese government bonds’ (JGBs) average maturity from 7-10 years to 7-12 years and announced that it will allocate 300 billion yen of assets annually in purchasing ETFs that seek to follow the JPX-Nikkei Index 400 (read: Yen ETF Gains on Bank of Japan Stimulus Changes ).
Japan ETFs in Focus
In this scenario, popular Japan ETFs and funds that closely track the performance of Nikkei will remain on investors’ radar in the coming months. MAXIS Nikkei 225 ETF ( NKY ), which tracks the performance of Nikkei 225 Index, returned nearly 9.4% last year. Meanwhile, performance of other popular Japan ETFs will also remain in focus in the near term. In 2015, iShares MSCI Japan ( EWJ ), WisdomTree Japan Hedged Equity ETF ( DXJ ) and Deutsche X-trackers MSCI Japan Hedged Eq ( DBJP ) returned 8.9%, 3.3% and 4.5%, respectively.
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