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Japan Keeps Monetary Policy Unchanged: ETFs in Focus

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The Bank of Japan (BOJ) governor Haruhiko Kuroda kept the interest rates and asset buying program intact in the recent policy meeting.

The BOJ maintained a negative 0.1% interest rate, which was widely anticipated by the markets. BOJ also maintained its stance on buying bonds amounting to 80 trillion yen annually. Critics are arguing if the current policy is sufficient to achieve the 2% inflation target of the BOJ in fiscal 2019 (read: Japan's Inflation Far From Target: ETFs in Focus).

GDP Growth

Japan’s GDP growth in the second quarter was a lot lower than initially estimated. Per government data released Sep 8, 2017, Japan’s economy grew an annualized 2.5% in the quarter compared with preliminary estimates of a 4% expansion.


Although the reading was below initial estimates, it still marks six straight quarters of expansion, and analysts believe the economy is on solid ground (read: Japan's Q2 GDP Revised Down: ETFs in Focus).


U.S. Fed Decision


The Federal Reserve decided in its latest policy meeting to leave interest rates unchanged but to begin winding down its $4.5 trillion balance sheet by October. The Fed also maintained its forecast of going ahead with another rate hike by the end of this year to a target of 1.25-1.5% despite the weakness in inflation. This is expected to work in Japan’s favor as the yen will be in check.


This decision led to a rally in the U.S. dollar and the weakness in yen made Japan’s exports more appealing to foreigners. Japanese equities gained following the diverging decisions by the central banks of both the countries.


Risks Involved


However, all is not well for the world’s third-largest economy. There are increased tensions relating to North Korea. North Korea conducted its seventh nuclear test, an Inter Continental Ballistic Missile that flew over Japan, on Sep 14, 2017. Kim Jong-Un’s actions have created huge unrest in a number of Asian economies and the United States.


Although increased geopolitical risks increase the appeal for the yen, Japan’s continued stimulus measures and the U.S. Fed’s stance on monetary policy are expected to weigh on the yen.


Owing to increased uncertainty around performance of the Japanese yen and immense pressure from growing geopolitical uncertainty, let us now discuss a few currency hedged ETFs focused on providing exposure to Japan (see Asia-Pacific (Developed) ETFs here).


WisdomTree Japan Hedged Equity Fund (DXJ - Free Report)


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 $8.06 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 25.5%, 21.9% and 13.4% exposure, respectively (as of Sep 20, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Japan Tobacco Inc are the top three holdings of the fund, with 5.4%, 3.5% and 3.5% exposure, respectively (as of Sep 20, 2017). It has returned 8.1% year to date and 27.0% in a year (as of Sep 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 - Free Report)


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 $1.56 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%, 20 % and 15% exposure, respectively. Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of the fund, with 4.6%, 2.2% and 1.9% exposure, respectively (as of Sep 19, 2017). It has returned 6.8% year to date and 22.5% in a year (as of Sep 8, 2017). As such, DBJP currently has a Zacks ETF Rank #3 with a Medium risk outlook.


iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report)


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 $1.25 billion and charges a fee of 49 basis points a year. From a sector look, Industrials, Consumer Discretionary and Information Technology are the top three allocations of the fund, with 20.4%, 20.1% and 12.7% exposure, respectively (as of Sep 19, 2017). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings of EWJ, with 4.7%, 2.3% and 2.0% exposure, respectively (as of Sep 19, 2017). It has returned 8.6% year to date and 23.6% in a year (as of Sep 20, 2017). As such, HEWJ currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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