Japan’s economic output surpassed its full capacity, per a Bank of Japan (BOJ) estimate. Moreover, the output gap for the April-June quarter is highest since the October-December quarter of 2007. Moreover, in the second quarter of 2018, Japan’s economy expanded at its fastest pace in over two years. The world’s third-largest economy registered expansion after a contraction in the prior quarter, following a rise in capital expenditure and a decline in imports.

Rising business investment has pushed up the country’s capex. Currently, there is a need to look beyond the success of the domestic market and diversify abroad, particularly Japan. A rising economic output gap, expanding economy and soaring capital spending, calls for investing in Japan mutual funds.

Economic Output Beats Full Capacity

According to data by the Research and Statistics Department, BOJ, output gap, an indicator of the level of economic activity, came in at 1.86 points in the second quarter of 2018. This is the highest output gap after 2.09 in the fourth quarter of 2007. Moreover, the output gap remained in the positive territory for the seventh straight quarter.

Additionally, a slew of economic data released over the last few days were also encouraging. Per Japan’s Cabinet Office, consumer confidence in September increased to 43.4 points from 43.3 points in August. The Nikkei Manufacturing PMI remained unchanged at 52.5 in September, registering expansion since 2016. Any level above 50 is considered expansion.

Retail sales jumped 2.7% year over year (y-o-y) in August, higher than July’s 1.5% y-o-y increase. Retail sales posted its best y-o-y rise since last December. Moreover, housing starts increased 1.6% y-o-y in August, after declining 0.7% in the preceding month. Construction orders also rose 0.5% y-o-y in August, after plunging 9.3% in July.

Best Q2 GDP Growth in 2 Years

According to the country’s Cabinet Office, Japan’s real GDP increased 3% in the second quarter, higher than the preliminary reading of a rise of 1.9%. Moreover, the third-largest economy expanded in the second quarter after contracting in the first quarter of 2018. Tetsufumi Yamakawa, an economist at Barclays Securities Japan said that this trend will continue “through mid-fiscal 2019, with the economy then reaching a turning point.”

Capital expenditure, a key component of GDP, increased 3.1% in the second quarter of 2018, significantly higher than the preliminary reading of a rise of 1.3%. Capex increased at the fastest pace since the first quarter of 2015. This was possibly one of the key drivers of Japan’s economic growth in the second quarter.

Additionally, exports — a significant growth driver for Japan’s economy — remained unchanged at an increase of 0.2%. However, imports were downgraded from the previous estimate of 1% to 0.9%, improving the balance of trade.

Buy These 3 Japan Mutual Funds

Japan’s economic output gap not only surpassed its full capacity but also registered its biggest gap in a decade. Moreover, the world’s third-largest economy expanded at its fastest pace in over two years. All these economic reports clearly indicate that Japan’s economy is stabilizing. Moreover, the Nikkei 225 has gained 7.9% and 9.7% over the last three and six months, respectively.

Additionally, mutual funds related to Japan’s equity market also registered strong returns. According to Morningstar, the region’s equity mutual funds posted three-month and one-year returns of 4.6% and 7%, respectively.

This upbeat backdrop calls for investing in three Japan mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have impressive one-year annualized returns. They also have minimum initial investment within $5000 and low expense ratios.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Fidelity Japan (FJPNX - Free Report) invests a large chunk of its assets in equity securities of Japanese companies as well as in those companies that are economically based in Japan. FJPNX seeks capital appreciation for the long run. The fund generally takes into account the industry position and financial condition as well as economic and market conditions of each of the companies before investing.

The fund has one-year annualized returns of 11.2% and an expense ratio of 0.82% as compared with the category average of 1.33%. FJPNX has a Zacks Mutual Fund Rank #2.

Moreover, FJPNX requires a minimal initial investment of $2,500. Kirk Neureiter is the fund manager since 2014.

T. Rowe Price Japan (PRJPX - Free Report) seeks capital appreciation for the long run by investing the majority of its assets in securities of companies that are based in Japan. PRJPX invests in a variety of Japanese companies and industries, irrespective of their size.

The fund has one-year annualized returns of 16.3% and an expense ratio of 0.97% as compared with the category average of 1.33%. PRJPX has a Zacks Mutual Fund Rank #1.

Moreover, PRJPX requires a minimal initial investment of $2,500. Archibald A. Ciganer is the fund manager since 2013.

Fidelity Advisor Japan A (FPJAX - Free Report) invests a huge portion of its assets in securities of Japanese companies and other companies that are economically based in Japan. The fund uses fundamental analysis of each company before investing in that particular entity. FPJAX seeks capital growth for the long run.

The fund has one-year annualized returns of 11% and an expense ratio of 1.10% as compared with the category average of 1.33%. FPJAX has a Zacks Mutual Fund Rank #2.

Moreover, FPJAX requires a minimal initial investment of $2,500. Kirk Neureiter is the fund manager since 2014.