Japan's Q2 GDP Beats Expectations: ETFs In Focus

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. However, this is preliminary data and going by the history, it might be revised.

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.

The Bank of Japan (BOJ) on July 20, 2017 kept its benchmark interest rate steady at -0.1%, while cutting its inflation forecast for the fiscal year ended March 2018 and March 2019.

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.

Consumer prices in Japan increased 0.4% year over year in June 2017, far from BOJ’s 2% target. The primary banking authority of Japan expects inflation to slow to 1.1% in the current fiscal year compared with its earlier forecast of 1.4% and to 1.8% in the next fiscal year compared with its earlier forecast of 1.9% (read: Bank of Japan Cuts Inflation Forecast: ETFs in Focus).

The primary reason that was being attributed to the historically low inflation was the weakness in private consumption. The recently released data might be indicative of the consumer spending issue fading (read: Japan Economy on the Mend? ETFs in Focus).

The unemployment rate fell to a 22-year low of 2.8% in June from 3.1% in May. 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.

However, all is not well for the world’s third largest economy. There are increased tensions relating to North Korea. Recent missile tests indicated that North Korean weapons are capable of reaching American posts and close to Japan’s territory. After Kim Jong-Un singled out the American post in Guam as a potential target, President Donald Trump stated that his threats will be met with ‘fire and fury’. Japan, being an important ally and a host to military bases of the U.S., is preparing itself to be able to respond to the threats from the North Korean dictator.

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 $8.27 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 25.16%, 21.70% and 13.26% exposure, respectively (as of August 11, 2017). Toyota Motor Corp, Japan Tobacco Inc and Mitsubishi UFJ Financial Group are the top three holdings of the fund, with 5.30%, 3.69% and 3.62% exposure, respectively (as of August 11, 2017). It has returned 0.87% year to date and 21.59% in the last one year (as of August 11, 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 $1.79 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%, 19 % and 14% exposure, respectively. Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.42%, 2.26% and 1.95% exposure, respectively (as of August 10, 2017). It has returned 0.68% year to date and 17.40% in the last one year (as of August 11, 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 $1.20 billion and charges a fee of 49 basis points a year. From a sector look, Industrials, Consumer Discretionary and Financials are the top three allocations of the fund, with 20.82%, 20.55% and 12.87% exposure, respectively (as of August 10, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.52%, 2.31% and 2.00% exposure, respectively (as of August 10, 2017). It has returned 2.51% year to date and 18.73% in the last one year (as of August 11, 2017). As such, HEWJ currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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