What's In Store For Japan ETFs

Japan’s inflation ticked down in March. Although economists say the slowdown does not indicate a reversal in trend, the reading is still far from the 2% target. The slowdown in March has introduced further uncertainty with regard to when the BOJ might achieve its target and clouded the central bank’s plans on exiting the easy monetary policies.

More into the Numbers

Japan's core inflation, which excludes volatile fresh food prices, hit 0.9% in March compared with 1.0% in the prior month, per data from the Ministry of Internal Affairs and Communications. It was in line with a forecast by economists polled by Bloomberg. Moreover, the “core-core” measure of inflation, which excludes volatile fresh food and energy prices increased 0.5% year over year in March, in line with the previous month.

"The underlying trend hasn’t changed because inflation excluding fresh food and energy remained the same," per a Bloomberg article citing Maiko Noguchi, a senior economist at Daiwa Securities Co. "I think that’s the measure the BOJ really cares about because the bank can’t achieve 2 percent in a stable manner if it fails to rise from the current 0.5 percent," he added.

The International Monetary Fund also expects consumer prices in Japan to go up. In its World Economic Outlook, the IMF said it expects Japan’s inflation reading to go up to 1.1% this year and the next. Bank of Japan’s easy money policies and Prime Minister Shinzo Abe’s stimulus measures are driving economic growth in Asia’s second largest economy. Moreover, with inflation still far from the target, market pundits do not seem to be convinced about governor Haruhiko Kuroda ending the monetary stimulus anytime soon (read: BoJ Mulling Over a Stimulus Exit: ETFs in Focus).

Global Factors at Play

The recovery in Japan’s economy has been largely driven by a revival in global growth and strong export demand. However, fears of a trade war amid increasing tensions between the United States and China coupled with a rising yen might be drags on the future of Japan’s economy.

A stronger yen is a negative for manufacturers, as it diminishes the appeal of Japanese products to foreigners and leads to a fall in exports. Adding to the agony, increased geopolitical risks related to the missile strike on Syria might increase the appeal of safe haven yen. For instance, CurrencyShares Japanese Yen Trust (FXY) has increased 4.4% so far this year.

Let us now discuss some ETFs focused on providing exposure to Japan (see Asia-Pacific (Developed) ETFs here).

iShares MSCI Japan ETF EWJ

This fund seeks to provide exposure to Japanese equities with a large-cap focus and follows the MSCI Japan index.

The fund has AUM of $21.6 billion and charges a fee of 49 basis points a year. From a sector look, Industrials, Consumer Discretionary and Technology are the top three allocations of the fund, with 21.0%, 20.0% and 12.6% exposure, respectively. Toyota Motor Corp, Mitsubishi UFJ Financial Group and Sony Corp (T:6758) are the top three holdings, with 4.6%, 2.1% and 1.7% exposure, respectively. It has returned 20.9% in a year. EWJ has a Zacks ETF Rank #1 (Strong Buy), with a Medium risk outlook.

First Trust Japan AlphaDEX Fund (PS:FJP)

This fund seeks to provide exposure to the Japanese equities with a large-cap focus and tracks the NASDAQ AlphaDEX Japan Index.

The fund has AUM of $164.7 million and charges a fee of 80 basis points a year. From a sector look, Industrials, Consumer Discretionary and Materials are the top three allocations of the fund, with 28.6%, 21.2% and 19.9% exposure, respectively. TDK Corporation, CyberAgent, Inc. and Nissan Motor Co., Ltd. are the top three holdings, with 1.9%, 1.8% and 1.8% exposure, respectively. The fund has returned 20.0% in a year. FJP has a Zacks ETF Rank #2 (Buy), with a Medium risk outlook.

iShares JPX-Nikkei 400 ETF JPXN

This fund seeks to provide exposure to Japanese equities with a large-cap focus and tracks the JPX-Nikkei Index 400.

The fund has AUM of $119.0 million and charges a fee of 48 basis points a year. From a sector look, Industrials, Consumer Discretionary and Financials are the top three allocations, with 22.7%, 18.1% and 11.6% exposure, respectively. Honda Motor Ltd, Sony Corp and Keyence Corp are the top three holdings, with 1.7% exposure each. The fund has returned 20.7% in a year. JPXN has a Zacks ETF Rank #2, with a Medium risk outlook.

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