Japan Inflation Ticks Up: ETFs In Focus

Japan's core consumer prices ticked up in November owing to a rise in prices of gasoline and utilities. However, it is still lagging Bank of Japan's (BOJ) target rate.

Economic Scenario

Japan's core consumer prices, which exclude prices of fresh food, increased 0.9% year over year in November compared with 0.8% in October. However, the increase was still far from BOJ's target of 2%. Fresh food is excluded owing to its highly volatile nature. Recently, OPEC extended its production cuts to late 2018, which provided support to oil prices. The statistics bureau attributed the rise in consumer prices to increasing prices of gasoline.

Japan's economy grew an annualized 2.5% in the third quarter compared with 2.9% in the prior quarter. Moreover, exports increased 0.6% sequentially in the third quarter compared with an initial reading of 0.3% (read: Japan ETFs in Focus as Business Confidence Hits 11-Year High).

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.

Wage earners' disposable income increased 1.8% year over year in November. Moreover, unemployment in Japan is at a 24-year low, as the jobless rate decreased to 2.7% in November compared with 2.8% in the previous month.

Moreover, household spending increased 1.7% year over year whereas the ratio of open jobs to unemployment increased to 1.56 from 1.55 in the previous month. The BOJ is seen maintaining status quo on stimulus because inflation is still far from its 2% target.

Risks Involved

Japan is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea's actions. Last month, North Korea launched a Hwasong-15 missile with improved technology that reached an altitude of more than 4,000 kilometers and travelled 1,000 kilometers before dropping into Sea of Japan.

Moreover, increasing political tensions in the Middle East seems to be clouding the outlook for companies going into 2018. Potential increase in tensions in the region might cause oil prices to further shoot and add to cost pressures of consumers.

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%, 22.6% and 13.4% exposure, respectively (as of Dec 26, 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 Dec 26, 2017). It has returned 19.9% year to date and 17.1% in a year (as of Dec 26, 2017). 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%, 19.5% and 13.0% exposure, respectively (as of Dec 22, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.5%, 2.4% and 2.3% exposure, respectively (as of Dec 22, 2017). It has returned 19.0% year to date and 16.5% in a year (as of Dec 26, 2017). 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 21.1%, 19.9% and 12.7% exposure, respectively (as of Dec 22, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.7%, 2.5% and 1.8% exposure, respectively (as of Dec 22, 2017). It has returned 21.2% year to date and 17.4% in a year (as of Dec 26, 2017). 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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