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ETFs in Focus as Bank of Japan Holds Policy Steady

Japan’s consumer prices increased for the ninth straight month in September. However, the markets see the rise in inflation as sluggish, since it is still far from Bank of Japan’s (BOJ) 2% target. In response, BOJ kept its monetary policy steady (read: Japan ETFs in Focus as Shinzo Abe Wins).


Economic Data


Core inflation, which excludes volatile items such as fresh food, grew 0.7% year over year, still far from BOJ’s 2% target. The rise was driven by a surge in energy prices.


Japan’s economy grew an annualized 2.5% in the second quarter compared with preliminary estimates of a 4% expansion. The International Monetary Fund upgraded its forecast for Japan’s growth rate to 1.5% for 2017 compared with its July forecast of 1.3% expansion as exports gain momentum (read: Japan ETFs in focus as Nikkei soars).


In its latest policy meeting, BOJ maintained its short-term interest rate at -0.1% and kept its stimulus measure intact, as inflation still remains moderate in the Japanese economy. This is in stark contrast to its developed peers like the United States and European countries, which have already begun setting policies to wind down their stimulus.


The BOJ maintained its expected inflation at 1.8% for fiscal 2018-2019 and 2% for fiscal 2019-2020. However, it lowered its core inflation forecast for fiscal 2017-2018 to 0.8% compared with its previous forecast of 1.1%.


Risks Involved


Although the Federal Reserve is widely expected to hike rates in its December policy meeting, there still remains some uncertainty regarding the future course Fed policies will take. This is primarily because of the uncertainty surrounding the next Fed chair. A rate hike will lead to a rally in the greenback against the yen, which in turn will be beneficial for Japanese exporters.


President Donald Trump is expected to announce his decision on the Fed chair this week. Although markets believe dovish Fed governor Jerome Powell is likely to replace Janet Yellen, the uncertainty clouds the outlook for the yen.


Japan is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions. North Korea has been continuously testing missiles to develop a nuclear program in order to safeguard itself from potential U.S. invasion, per North Korean leader Kim Jong-Un.


In a latest development, experts are expecting North Korea to conduct another nuclear test this week, as Trump is scheduled to visit China and South Korea later this week.


Increasing geopolitical uncertainty and relative lack of consensus regarding a rate hike by the Fed make 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 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 $9.0 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%, 22.2% and 13.6% exposure, respectively (as of Oct 30, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Japan Tobacco Inc are the top three holdings of the fund, with 5.4%, 3.7% and 3.3% exposure, respectively (as of Oct 30, 2017). It has returned 16.4% year to date and 28.1% in a year (as of Oct 30, 2017).


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 $1.7 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 4.5%, 2.3% and 2.1% exposure, respectively (as of Oct 27, 2017). It has returned 14.9% year to date and 25.3% in a year (as of Oct 30, 2017).


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 $1.3 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 20.4%, 19.6% and 12.8% exposure, respectively (as of Oct 27, 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 2.1% exposure, respectively (as of Oct 27, 2017). It has returned 16.9% year to date and 26.4% in a year (as of Oct 30, 2017).


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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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