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Bank of Japan Cuts Inflation Forecast: ETFs in Focus

The Bank of Japan 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. The Bank of Japan’s decision led to a decline in the yen.


Moreover, it kept its stimulus package intact, with no changes in its policy of injecting trillions of yen each year into the economy through government bond purchases.


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 1.5% in the next fiscal year compared with its earlier forecast of 1.7%.


Core inflation in Japan (excluding food) grew 0.4% year over year in May 2017 compared with 0.3% in April. This was the fastest rise in more than two years, but it still remains far from the Bank of Japan’s 2% target rate.


The central bank raised its GDP growth forecast for the current and the next fiscal year on account of better economic sentiment and higher exports. It now expects the economy to advance 1.8% in the current fiscal compared with its previous forecast of 1.6% and 1.4% in the next fiscal compared with its previous forecast of 1.3% (read: Japan Economy on the Mend? ETFs in Focus).


Japan’s GDP grew 0.3% sequentially in the first quarter of 2017, unchanged from the previous quarter. Consumer confidence improved marginally to 43.6 in May compared with 43.2 in April, while the business confidence index increased to 12 in the first quarter of 2017 compared with 10 in the fourth quarter of 2016 (read: Japan's Exports Rise Fastest in 2 Years: ETFs in Focus).


Export growth in June grew 9.7% year-over-year compared with 14.9% in May. Despite the growth rate slowing, it is still strong and analysts predict it will have negligible effect on GDP growth.


Owing to increased uncertainty around performance of the Japanese yen and immense pressure from growing political uncertainty in the U.S., let us now discuss a few currency hedged ETFs focused on providing exposure to Japan (see all 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 $8.46 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 24.90%, 21.40% and 13.36% exposure, respectively (as of July 20, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Japan Tobacco Inc are the top three holdings of the fund, with 5.12%, 3.71% and 3.65% exposure, respectively (as of July 20, 2017). It has returned 6.26% year to date and 27.09% in the last one year (as of July 20, 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 Financials are the top three allocations of the fund, with 19.58%, 19.19% and 12.41% exposure, respectively (as of July 19, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.22%, 2.28% and 2.02% exposure, respectively (as of July 19, 2017). It has returned 5.37% year to date and 20.97% in the last one year (as of July 20, 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 $1.21 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 20.48%, 20.20% and 13.00% exposure, respectively (as of July 19, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.39%, 2.37% and 2.10% exposure, respectively (as of July 19, 2017). It has returned 7.23% year to date and 22.02% in the last one year (as of July 20, 2017). As such, HEWJ currently has a Zacks ETF Rank #3 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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