Japan ETFs In Focus As Retail Sales Fall

Japan’s retail sales fell short of expectations in October, after a weak GDP reading in the third quarter. Retail sales declined 0.2% year-over-year in October compared with expectations of 0.2% increase, per the Ministry of Economy, Trade, and Industry. Moreover, it remained unchanged on a monthly basis compared with expectations of an increase of 0.2% (read: Japan GDP Grows for Seven Straight Quarters: ETFs in Focus).

Japan’s economy grew an annualized 1.4% in the third quarter compared with 2.6% in the prior quarter. However, it grew for the seventh straight quarter owing to strong exports. This is also the longest streak of GDP growth since 2001 (read: ETFs in Focus as Bank of Japan Holds Policy Steady).

Economic Data

Exports have been driving GDP growth in Japan. Although private consumption was recovering, it slowed in the most recent quarter. Consumer spending declined 0.5% in the September quarter. This has been blamed on harsh weather, as heavy rain forced shoppers to stay home. However, this is expected to be temporary as the economy is near full employment, which will in turn bolster domestic consumption in the future. Moreover, the government expects high consumer confidence to contribute toward the rebound in consumption.

The International Monetary Fund upgraded its forecast for Japan’s growth rate to 1.5% in 2017 compared with its July forecast of 1.3%, as exports gained momentum.

Wall Street Impact

"The case for raising interest rates at our next meeting is coming together," Jerome Powell told the Senate Banking Committee in his Senate confirmation hearing. Per the CME Fed Watch tool, there is a 92.8% chance of a 25 basis point rate hike and 7.2% chance of a 50 basis point rate hike in December.

If the Fed hikes rates, it will lead to an appreciation of the greenback and a decline in the yen. A weaker yen is a positive for Japanese exporters.

Geopolitical Risks

Japan is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions. North Korea launched a Hwasong-15 missile with improved technology that can put the entire United States in range, per Korean Central News Agency (KCNA).

North Korean leader Kim Jong-Un made claims of his regime completing its nuclear program, as it broke its two-month-long period of silence by testing a missile that reached an altitude of more than 4,000 kilometers.

Increased geopolitical uncertainty makes us look for 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 $9.2 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 25.0%, 22.2% and 13.9% exposure, respectively (as of Nov 28, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Japan Tobacco Inc are the top three holdings of the fund, with 5.4%, 3.6% and 3.3% exposure, respectively (as of Nov 28, 2017). It has returned 17.2% year to date and 20.6% in a year (as of Nov 28, 2017). DXJ 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 $1.9 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 20.2%, 19.7% and 13.0% exposure, respectively (as of Sep 30, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.5%, 2.3% and 2.0% exposure, respectively (as of Nov 27, 2017). It has returned 16.4% year to date and 20.0% in a year (as of Nov 28, 2017). DBJP 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 $1.2 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 the fund, with 21.0%, 20.5% and 13.6% exposure, respectively (as of Nov 27, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.6%, 2.3% and 2.0% exposure, respectively (as of Nov 27, 2017). It has returned 18.5% year to date and 21.0% in a year (as of Nov 28, 2017). HEWJ has a Zacks ETF Rank #3 with a Medium risk outlook.

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