Japan GDP Grows For Seven Straight Quarters: ETFs In Focus

Japan’s GDP improved at an impressive pace in the quarter ended September and 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).

Japan’s economy grew an annualized 1.4% in the third quarter compared with 2.6% in the prior quarter. However, GDP grew above a Reuters forecast of 1.3%, per Cabinet Office data. Moreover, it increased 0.3% sequentially in the third quarter compared with 0.6% in the second quarter.

Economic Data

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.

Although domestic demand declined 0.2% sequentially, improvement in exports and weaker imports provided support to economic growth. Exports grew 1.5% sequentially and imports shrank 1.6%. Net exports added 0.5% to GDP.

Consumer spending declined 0.5% in the quarter. 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, capital expenditure increased 0.2% sequentially in the quarter compared with forecasts of 0.3%.

Wall Street Impact

The U.S. GDP grew 3% annually in the July-September period compared with a 3.1% increase in the third quarter. Also, it surpassed expectations of 2.5% growth. Moreover, markets anticipate an interest rate hike in the December meeting of the Fed. Per the CME Fed Watch tool, there is a 91.5% chance of a 25 basis point rate hike and 8.5% 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.

Risks Involved

Japan is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions.

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 $9.1 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 24.9%, 22.3% and 13.9% exposure, respectively (as of Nov 15, 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 15, 2017). It has returned 14.9% year to date and 25.0% in a year (as of Nov 15, 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 $1.8 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 (Sep 30, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.6%, 2.2% and 1.9% exposure, respectively (as of Nov 14, 2017). It has returned 14.1% year to date and 24.2% in a year (as of Nov 15, 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 20.7%, 20.0% and 13.1% exposure, respectively (as of Nov 14, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.6%, 2.2% and 2.0% exposure, respectively (as of Nov 14, 2017). It has returned 16.1% year to date and 25.1% in a year (as of Nov 15, 2017). HEWJ has a Zacks ETF Rank #3 with a Medium risk outlook.

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