Japan's Inflation Far From Target: ETFs In Focus

Core consumer prices in Japan, which excludes price of fresh food, grew 0.5% year over year in July compared with 0.4% in the previous month. Headline CPI increased 0.4% in July.

The reading remains well below Bank of Japan’s 2% inflation target. The increase was primarily driven by a rise in price of electricity and energy. Excluding the impact of food and energy, consumer prices expanded 0.1% in the month.

This report has confirmed that Japan needs to continue its stimulus measures unlike its American and European counterparts who are aiming to cut down on it. The stimulus measures weaken the yen, thus making exports cheaper to foreigners. This is a key factor for the Japanese economy, as it is heavily dependent on exports.

Japan’s GDP grew for the sixth straight time in the second quarter of 2017. It expanded an annualized 4%, beating market expectations of 2.5%. This compares with a revised growth of 1.5% in the last quarter (read: Japan's Q2 GDP Beats Expectations: ETFs in Focus).

The better-than-expected growth was driven by higher private consumption and business spending. While private consumption increased 0.9% sequentially in the second quarter, business spending rose 2.4%. On account of an increase in imports, net export led to a 0.3% decline in GDP.

This presents a paradox for Japan, as it experiences staggering GDP growth, but disappointing inflation numbers. The extremely low inflation figure will prevent the central bank from raising interest rates in the near future.

The Bank of Japan (BOJ) on July 20, 2017 kept its benchmark interest rate intact at -0.1%. It expects inflation to be 1.1% and 1.5% compared with previous estimates of 1.4% and 1.7% in March 2018 and 2019, respectively. The BOJ aims to achieve this target by 2020.

Moreover, the job-to-applicant ratio increased to 1.51 from 1.49 in May. Consumer confidence improved marginally to 43.8 in July from 43.3 in June, while the business confidence index increased to 17 in the second quarter of 2017 from 12 in the first quarter of 2017.

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 those 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 $7.96 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 25.11%, 21.68% and 13.42% exposure, respectively (as of August 24, 2017). Toyota Motor Corp, Japan Tobacco Inc and Mitsubishi UFJ Financial Group are the top three holdings of the fund, with 5.26%, 3.68% and 3.50% exposure, respectively (as of August 24, 2017). It has returned 3.47% year to date and 23.13% in the last one year (as of August 24, 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 $1.74 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 14% exposure, respectively. Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.40%, 2.19% and 1.98% exposure, respectively (as of August 23, 2017). It has returned 4.38% year to date and 21.60% in the last one year (as of August 24, 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 $1.19 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 20.96%, 20.48% and 12.77% exposure, respectively (as of August 23, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.50%, 2.23% and 2.03% exposure, respectively (as of August 23, 2017). It has returned 4.86% year to date and 21.11% in the last one year (as of August 24, 2017). As such, HEWJ currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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