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What Lies Ahead For Japan ETFs?

Japan’s manufacturing activity in December expanded at its fastest pace since February 2014, per the Nikkei Japan Manufacturing Purchasing Managers' Index (PMI). Strong global recovery provided support to Japanese manufacturing activity.


"Firms took advantage of the robust demand backdrop and raised selling prices for a twelfth month in a row. This will provide encouragement that the aggressive monetary easing Bank of Japan policymakers have pursued is being effectively transmitted into the economy," said Joe Hayes, economist at IHS Markit, which compiles the survey.


More Into the Headlines


Japan’s manufacturing sector ended 2017 on a high, as the Nikkei-Markit Japan PMI reflected strong data in December. Japan’s manufacturing PMI increased to 54 in December compared with 53.6 in the previous month. A reading of more than 50 indicates expansion (read: Japan ETFs Will Continue Their Stellar Run in 2018).


Coming to the drivers of the manufacturing sector this month, output growth increased to its strongest rate in 46 months in December, owing to new domestic and overseas business. “Output growth accelerated for a fifth month in succession, while new business opportunities, both domestic and foreign, rose sharply,” said Hayes.


As far as orders are concerned, final new orders index increased to 56.2 in December compared with 54.7 in the previous month. However, this was below the flash reading of 56.6.


Economic Scenario


Japan’s economy grew an annualized 2.5% in the third quarter compared with 2.9% in the prior quarter. Moreover, the outlook for business conditions seems strong. Bank of Japan’s Tankan survey of more than 1,000 companies reported a reading of 25 in its December report. This is the highest since December 2006 and above 22 reported in September. This index shows the difference between firms that are upbeat about business conditions and firms that expect unfavorable conditions.


Bank of Japan’s easy money policies and prime minister Shinzo Abe’s stimulus measures are providing support to economic growth. Moreover, a weaker yen is a positive for manufacturers, as it increases the appeal of Japanese products to foreigners and leads to a rise in exports.


Risks Involved


Japan is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions. In his New Year address, North Korean premier Kim Jong-Un delivered a speech that rattled investors. Kim took the opportunity to warn the United States of possible nuclear action if his country is threatened. "The entire United States is within range of our nuclear weapons, a nuclear button is always on my desk. This is reality, not a threat," Kim stated in his speech (read: What Does Kim Jong-Un's Speech Hold For Safe Haven ETFs?).


Moreover, Japan’s ageing population pose some risks to the country’s workforce, leading to a decline in business confidence in the region.


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 suited for investors looking for a broad-based exposure to Japan’s economy. It seeks to invest in dividend-paying companies with an export tilt.


The fund has AUM of $9.5 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%, 22.8% and 13.3% exposure, respectively (as of Jan 3, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group are the top three holdings of the fund, with 5.4%, 3.8% and 3.2% exposure, respectively (as of Jan 3, 2017). It has returned 22.9% in a year. DXJ has a Zacks ETF Rank #1 (Strong Buy) 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 $2.0 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 20.8%, 19.4% and 12.8% exposure, respectively (as of Jan 2, 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 1.7% exposure, respectively (as of Jan 2, 2017). It has returned 21.5% in a year. DBJP has a Zacks ETF Rank #1 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 $1.1 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 21.7%, 20.3% and 12.8% exposure, respectively (as of Jan 2, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.6%, 2.4% and 1.8% exposure, respectively (as of Jan 2, 2017). It has returned 21.8% in a year. HEWJ has a Zacks ETF Rank #1 with a Medium risk outlook.


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WISDMTR-J HEF (DXJ): ETF Research Reports
 
ISHA-CH MS JAP (HEWJ): ETF Research Reports
 
DEUTS-XT MS JPN (DBJP): ETF Research Reports
 
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