What's In Store For Japan ETFs As Inflation Picks Up?

Japan’s core inflation ticked up in February, taking the Bank of Japan closer to its 2% target. However, it is still far from the target and lacks an inflationary trend, introducing further uncertainty with regard to when the BOJ might achieve its target.

More Into the Numbers

Japan's core inflation, which excludes volatile fresh food prices, hit 1% for the first time in three and a half years in February compared with 0.9% 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 Nikkei. Moreover, the “core-core” measure of inflation, which excludes volatile fresh food and energy prices increased 0.5% year over year in February compared with 0.4% in January.

Japan’s economy grew at an annualized 1.6% in Q4 compared with the preliminary estimate of 0.5%. Bank of Japan’s easy money policies and prime minister Shinzo Abe’s stimulus measures are driving economic growth. Moreover, with inflation still far from the target, the central bank does not seem to be convinced about ending the monetary stimulus anytime soon (read: Japan ETFs to Buy as GDP Growth Revised Upward).

Risks Involved

The recovery in Japan’s economy has been largely driven by a revival in global growth and strong export demand. However, fears of rising protectionism and a rising yen might be drags on the Japanese economy’s future.

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. Thus, the recent strength in yen has been weighing on Japanese stocks. For instance, CurrencyShares Japanese Yen Trust FXY has increased 6.5% so far this year (read: Safe Haven ETFs to Buy on Trump's Tariff Plans).

Moving on, President Trump has initiated fears of a trade war owing to his protectionist agenda, Trump’s tariff on steel and aluminum imports might weigh on Japanese stocks. Adding to the agony, trade war fears have increased the appeal of the Japanese yen as a safe haven instrument, a further negative for Japan’s manufacturers.

"If the targeted goods widen to other products like cars, the significance of this for Japan’s economy would go up to a totally different level," per a Bloomberg article citing Junko Nishioka, chief economist at Sumitomo Mitsui Banking Corp.

Let us now discuss a few 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 (read: Country ETFs to be Impacted by Trump's Tariff Plans).

The fund has AUM of $22.0 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 21.1%, 20.2% and 13.1% exposure, respectively. Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings, with 4.7%, 2.2% and 1.8% exposure, respectively. It has returned 17.1% 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 $151.8 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 28.7%, 21.0% and 20.3% exposure, respectively. TDK Corporation, Hitachi Construction Machinery Co., Ltd. and Minebea Co., Ltd are the top three holdings, with 2.0%, 1.8% and 1.8% exposure, respectively. The fund has returned 15.2% 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 $108.8 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 22.8%, 18.2% and 11.9% exposure, respectively. Honda Motor Ltd, Keyence Corp and Toyota Motor Corp are the top three holdings, with 1.7% exposure each. The fund has returned 17.2% in a year. JPXN has a Zacks ETF Rank #2, with a Medium risk outlook.

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