Japan's Q2 GDP Revised Down: ETFs In Focus

Japan’s GDP growth in the second quarter was a lot lower than initially estimated. Per government data released Sep 8, 2017, Japan’s economy grew an annualized 2.5% in the quarter compared with preliminary estimates of a 4% expansion. Although the reading was below initial estimates, it still marks six straight quarters of expansion and analysts believe the economy is on a strong footing (read: Japan's Q2 GDP Beats Expectations: ETFs in Focus).

Economic Data Revision

Business spending growth was revised down to 0.5% in the second quarter from an initial estimate of 2.4%. This was a major factor that led to the GDP reading being revised.

Moreover, private consumption, accounting for 60% of GDP growth, increased 0.8% in the quarter compared with the initial estimate of 0.9%. However, net exports were unchanged from the initial estimate. It contracted 0.3% in the quarter.

Monetary Policy

The Bank of Japan (BOJ) on July 20, 2017 kept its benchmark interest rate unchanged at -0.1%.

Moreover, it kept its stimulus package intact, with no changes in its policy of injecting trillions of yen every year into the economy through government bond purchases. This weakens the yen, thus making exports cheaper to foreigners. This is a key factor for the Japanese economy, as it is heavily dependent on exports.

Core consumer prices in Japan increased 0.5% year over year in July 2017, far from BOJ’s 2% target. The primary banking authority of Japan expects inflation to be 1.1% in the current fiscal year and 1.8% in the next fiscal year (read: Japan's Inflation Far From Target: ETFs in Focus).

This inflation reading has confirmed that Japan needs to continue its stimulus measures unlike its American and European counterparts, who are planning to cut down on it.

Risks Involved

However, all is not well for the world’s third-largest economy. Wage growth remains tepid, thus reducing the impact of the massive stimulus measures.

Moreover, there are increased tensions relating to North Korea. North Korea conducted its sixth nuclear test, that of a hydrogen bomb, which can be mounted on an Inter Continental Ballistic Missile, on Sep 3, 2017.

Moreover, just a few days before the hydrogen bomb test, North Korea had launched a missile that flew over Japanese airspace. Kim Jong-Un’s actions have created huge unrest in a number of Asian economies and the United States.

Although growing geopolitical uncertainty has led to a surge in the appeal of yen as a safe haven asset, Japan is expected to continue with its stimulus program. This might weigh on the yen and make Japan’s exports appealing to foreigners.

Owing to increased uncertainty around performance of the Japanese yen and immense pressure from growing geopolitical uncertainty, let us now discuss a few currency hedged ETFs focused on providing exposure to Japan (see Asia-Pacific (Developed) ETFs here).

WisdomTree Japan Hedged Equity Fund DXJ

This fund is suitable for investors looking for a broad-based exposure to the Japanese economy. It seeks to invest in dividend-paying companies with an export tilt.

The fund has AUM of $7.86 billion and charges a fee of 48 basis points a year. From a sector look, Consumer Discretionary, Industrials and Information Technology are the top three allocations of the fund, with 25.22%, 21.98% and 13.28% exposure, respectively (as of Sep 8, 2017). Toyota Motor Corp, Japan Tobacco Inc and Mitsubishi UFJ Financial Group are the top three holdings of the fund, with 5.33%, 3.60% and 3.45% exposure, respectively (as of Sep 8, 2017). It has returned 2.08% year to date and 20.29% in a year (as of Sep 8, 2017). As such, DXJ currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Deutsche X-trackers MSCI Japan Hedged Equity ETF DBJP

This fund seeks to provide exposure to Japanese equities with a large-cap focus, while hedging away the currency risk.

The fund has AUM of $1.52 billion and charges a fee of 45 basis points a year. From a sector look, Industrials, Consumer Discretionary and Technology are the top three allocations of the fund, with 20%, 20 % and 15% exposure, respectively. Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.46%, 2.16% and 1.91% exposure, respectively (as of Sep 7, 2017). It has returned 1.64% year to date and 17.25% in a year (as of Sep 8, 2017). As such, DBJP currently has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares Currency Hedged MSCI Japan ETF HEWJ

This fund is the currency hedged equivalent of EWJ. It seeks to provide exposure to Japanese equities with a large-cap focus, while hedging away the fluctuations between the USD and JPY.

The fund has AUM of $1.17 billion and charges a fee of 49 basis points a year. From a sector look, Industrials, Consumer Discretionary and Information Technology are the top three allocations of EWJ, with 21.07%, 20.51% and 12.74% exposure, respectively (as of Sep 7, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.55%, 2.21% and 1.97% exposure, respectively (as of Sep 7, 2017). It has returned 3.08% year to date and 18.09% in a year (as of Sep 8, 2017). As such, HEWJ currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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