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Japan's second-quarter GDP for 2023 has surged due to robust exports and a significant inflow of tourists, indicating that the country is emerging from its Covid slump. While these factors contribute to the impressive growth, concerns arise from declining imports and reduced private consumption, casting a pall on the optimistic figurers.
Superficial Growth in GDP?
According to BBC, the world’s third largest economy saw its GDP grow by an annualized rate of 6% in the second quarter of 2023, surpassing expectations. The growth marked the most substantial increase in nearly three years and was double the economist's projections.
The explosive growth within the country was fueled by an impressive export sector. However, the rise in exports was mainly backed by a weaker Yen, making Japanese goods cheaper for global consumers. Japan's currency has experienced a significant decline against major counterparts in recent months, plummeting more than 10% against the US dollar this year. A weakened currency also saw import levels falling about 4.3% from the previous quarter.
Japan’s economy was also helped by inbound tourists, which saw a boost after the government lifted its border restrictions at the end of April. By June, the country's national tourism authority reported that foreign visitor numbers had rebounded to over 70% of the pre-pandemic levels. Anticipated spending by tourists is poised to provide a substantial economic lift to Japan starting this month.
However, despite the remarkable growth, the government still faces challenges from falling private consumption levels, which make up more than 50% of the Japanese economy. In addition to the decline in export levels during July, these factors continue to raise concerns about the true extent of the economy's recovery.
Falling Domestic Consumption
Sayuri Shirai, an economics professor at Keio University and a former Bank of Japan board member, as quoted in the New York Times, pointed out that both households and corporations are cutting back on domestic spending, indicating challenges.
Per a New York Times article, domestic spending in Japan has not kept up with the strong export data. Domestic spending has decreased due to the yen's weakness. Japan relies heavily on imports for essentials like food and energy, and the yen's long-term decline against the dollar has raised costs, causing inflation levels not seen in decades. This currency depreciation is primarily due to Japan's persistently low interest rates in contract with the rate increases in the United States and other nations.
Exports Fell in July
According to Reuters, after witnessing growth in the second quarter, Japan's exports experienced the first decline in July after almost two and a half years. The main culprit was less demand for items such as light oil and chip-making equipment. This highlights the concerns regarding a global recession due to a weakening Chinese economy.
Recent data, released by the Ministry of Finance on Aug 17, show the 0.3% year-over-year fall witnessed in the month of July which, however, was less than the projected fall of 0.8% in exports by economists polled by Reuters.
Japanese officials are depending on exports to strengthen the economy and offset weakened private spending caused by higher prices. Yet, worries arise due to a potential sharper worldwide slowdown and China's struggling growth.
Policy Shift to Dramatically Change the Scenario?
According to a Reuters article, around 40% of Japanese companies anticipate the recent policy shift by the central bank will affect their fundraising, revealing their sensitivity to policy changes after years of significant easing.
The possibility of the Bank of Japan moving away from its super-loose monetary approach has stirred concerns about increased borrowing expenses in the third-largest global economy. Additionally, if long-term interest rates reach 1%, a level the central bank currently permits for 10-year bond yields, roughly two-thirds of businesses expect an impact on their fundraising.
ETFs in Focus
Those who seek to navigate Japan's economic landscape effectively, should track the below-mentioned ETFs closely.
iShares MSCI Japan ETF seeks to track the performance of MSCI Japan Index with a basket of 237 securities. Approximately 78.26% of the fund's assets are allocated to the large-cap segment, contributing to reduced volatility in relation to the economy. EWJ has amassed an asset base of $13.36 billion and charges an annual fee of 0.50%.
iShares MSCI Japan ETF has major allocations to the industrial sector with a share of 23.26%. The fund has a Zacks ETF Rank #3 (Hold) and a Medium risk outlook.
JPMorgan BetaBuilders Japan ETF seeks to track the performance of the Morningstar Japan Target Market Exposure Index with a basket of 267 securities. About 75.52% of the fund's assets are attributed to the large-cap category, which serves to mitigate volatility within the economic context. BBJP has gathered an asset base of $8.67 billion and charges an annual fee of 0.19%.
JPMorgan BetaBuilders Japan ETF has major allocations to the industrial and consumer discretionary sectors, with a share of 26.2% and 23.3%, respectively. The fund has a Zacks ETF Rank #3.
The WisdomTree Japan Hedged Equity Fund aims to offer exposure to the Japanese equity market while also mitigating the impact of fluctuations between the U.S. dollar and the yen. The fund has a basket of 435 securities and an asset base of $2.76 billion. DXJ charges an annual fee of 0.48%.
WisdomTree Japan Hedged Equity Fund has parked about 72.22% of its asset in large-cap equities, with a major allocation in the industrial sector (27.04%). The fund has a Zacks ETF Rank #3 and a Medium risk outlook.
Franklin FTSE Japan ETF seeks to track the performance of the FTSE Japan RIC Capped Index with a basket of 515 securities. BBJP has gathered an asset base of $1.55 billion and charges an annual fee of 0.09%.
About 67.99% of the fund's assets are attributed to the large-cap category, with a major allocation of 23.61% to the industrial sector. The fund has a Zacks ETF Rank #3.
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Should You Invest in Japan ETFs Now?
Japan's second-quarter GDP for 2023 has surged due to robust exports and a significant inflow of tourists, indicating that the country is emerging from its Covid slump. While these factors contribute to the impressive growth, concerns arise from declining imports and reduced private consumption, casting a pall on the optimistic figurers.
Superficial Growth in GDP?
According to BBC, the world’s third largest economy saw its GDP grow by an annualized rate of 6% in the second quarter of 2023, surpassing expectations. The growth marked the most substantial increase in nearly three years and was double the economist's projections.
The explosive growth within the country was fueled by an impressive export sector. However, the rise in exports was mainly backed by a weaker Yen, making Japanese goods cheaper for global consumers. Japan's currency has experienced a significant decline against major counterparts in recent months, plummeting more than 10% against the US dollar this year. A weakened currency also saw import levels falling about 4.3% from the previous quarter.
Japan’s economy was also helped by inbound tourists, which saw a boost after the government lifted its border restrictions at the end of April. By June, the country's national tourism authority reported that foreign visitor numbers had rebounded to over 70% of the pre-pandemic levels. Anticipated spending by tourists is poised to provide a substantial economic lift to Japan starting this month.
However, despite the remarkable growth, the government still faces challenges from falling private consumption levels, which make up more than 50% of the Japanese economy. In addition to the decline in export levels during July, these factors continue to raise concerns about the true extent of the economy's recovery.
Falling Domestic Consumption
Sayuri Shirai, an economics professor at Keio University and a former Bank of Japan board member, as quoted in the New York Times, pointed out that both households and corporations are cutting back on domestic spending, indicating challenges.
Per a New York Times article, domestic spending in Japan has not kept up with the strong export data. Domestic spending has decreased due to the yen's weakness. Japan relies heavily on imports for essentials like food and energy, and the yen's long-term decline against the dollar has raised costs, causing inflation levels not seen in decades. This currency depreciation is primarily due to Japan's persistently low interest rates in contract with the rate increases in the United States and other nations.
Exports Fell in July
According to Reuters, after witnessing growth in the second quarter, Japan's exports experienced the first decline in July after almost two and a half years. The main culprit was less demand for items such as light oil and chip-making equipment. This highlights the concerns regarding a global recession due to a weakening Chinese economy.
Recent data, released by the Ministry of Finance on Aug 17, show the 0.3% year-over-year fall witnessed in the month of July which, however, was less than the projected fall of 0.8% in exports by economists polled by Reuters.
Japanese officials are depending on exports to strengthen the economy and offset weakened private spending caused by higher prices. Yet, worries arise due to a potential sharper worldwide slowdown and China's struggling growth.
Policy Shift to Dramatically Change the Scenario?
According to a Reuters article, around 40% of Japanese companies anticipate the recent policy shift by the central bank will affect their fundraising, revealing their sensitivity to policy changes after years of significant easing.
The possibility of the Bank of Japan moving away from its super-loose monetary approach has stirred concerns about increased borrowing expenses in the third-largest global economy. Additionally, if long-term interest rates reach 1%, a level the central bank currently permits for 10-year bond yields, roughly two-thirds of businesses expect an impact on their fundraising.
ETFs in Focus
Those who seek to navigate Japan's economic landscape effectively, should track the below-mentioned ETFs closely.
iShares MSCI Japan ETF (EWJ - Free Report)
iShares MSCI Japan ETF seeks to track the performance of MSCI Japan Index with a basket of 237 securities. Approximately 78.26% of the fund's assets are allocated to the large-cap segment, contributing to reduced volatility in relation to the economy. EWJ has amassed an asset base of $13.36 billion and charges an annual fee of 0.50%.
iShares MSCI Japan ETF has major allocations to the industrial sector with a share of 23.26%. The fund has a Zacks ETF Rank #3 (Hold) and a Medium risk outlook.
JPMorgan BetaBuilders Japan ETF (BBJP - Free Report)
JPMorgan BetaBuilders Japan ETF seeks to track the performance of the Morningstar Japan Target Market Exposure Index with a basket of 267 securities. About 75.52% of the fund's assets are attributed to the large-cap category, which serves to mitigate volatility within the economic context. BBJP has gathered an asset base of $8.67 billion and charges an annual fee of 0.19%.
JPMorgan BetaBuilders Japan ETF has major allocations to the industrial and consumer discretionary sectors, with a share of 26.2% and 23.3%, respectively. The fund has a Zacks ETF Rank #3.
WisdomTree Japan Hedged Equity Fund (DXJ - Free Report)
The WisdomTree Japan Hedged Equity Fund aims to offer exposure to the Japanese equity market while also mitigating the impact of fluctuations between the U.S. dollar and the yen. The fund has a basket of 435 securities and an asset base of $2.76 billion. DXJ charges an annual fee of 0.48%.
WisdomTree Japan Hedged Equity Fund has parked about 72.22% of its asset in large-cap equities, with a major allocation in the industrial sector (27.04%). The fund has a Zacks ETF Rank #3 and a Medium risk outlook.
Franklin FTSE Japan ETF (FLJP - Free Report)
Franklin FTSE Japan ETF seeks to track the performance of the FTSE Japan RIC Capped Index with a basket of 515 securities. BBJP has gathered an asset base of $1.55 billion and charges an annual fee of 0.09%.
About 67.99% of the fund's assets are attributed to the large-cap category, with a major allocation of 23.61% to the industrial sector. The fund has a Zacks ETF Rank #3.