GDP growth in the world’s third-largest economy expanded more than initially thought, owing to an upward revision in key business areas. It grew for eight consecutive quarters, the longest streak since a 12-quarter expansion ended in 1989, the period of Japan’s economic bubble.
Into the Headlines
Japan’s economy grew at an annualized 1.6% in Q4 compared with preliminary estimate of 0.5% and above economists’ expectations of 0.9%. However, it slowed from the previous quarter’s 2.4% annualized growth in GDP. Bank of Japan’s easy money policies and prime minister Shinzo Abe’s stimulus measures are driving economic growth. The central bank does not seem to be convinced with ending the monetary stimulus anytime soon.
Coming to the drivers of economic growth, accounting for two-thirds of GDP, private consumption grew 0.5% compared with a contraction of 0.6% in the previous quarter and unchanged from preliminary estimates.
However, capital expenditure increased a revised 1.0% sequentially in the quarter compared with a 0.7% expansion in the preliminary report. Capital expenditure increased for the fifth straight quarter, driving optimism on higher business investment. Moreover, public investment was revised up to a 0.2% drop compared with a decline of 0.5% reported earlier.
Per data released last week, core consumer inflation increased 0.9% in February, still far from the central bank’s 2% target. Moreover, retail sales in Japan fell 1.8% in January compared with a 0.9% gain in the previous month. This hints at a relatively weaker future in the coming quarters, as a result of which policymakers need to be cautious about the stimulus measures.
"Recent weak data such as industrial output and retail sales for January suggest GDP growth may slow in the first quarter," per a Business Times article citing Masaki Kuwahara, senior economist at Nomura Securities.
Economic Scenario and Risks Involved
A stronger yen is a negative for manufacturers, as it diminishes the appeal of Japanese products to foreigners and leads to a fall in exports. Thus, the recent strength in yen has been weighing on Japanese stocks. For instance, CurrencyShares Japanese Yen Trust (FXY) increased 3.3% in the past month (read: Safe Haven ETFs to Buy on Trump's Tariff Plans).
Moreover, Trump’s plans of implementing 25% tariff on steel imports and 10% tariff on aluminum imports might weigh on Japanese stocks. Adding to the agony, this has increased appeal of the Japanese yen as a safe haven instrument, a further negative for Japan’s manufacturers.
However, there is slight relief on the geopolitical risks side. North Korea has offered denuclearization talks in case security for its regime is guaranteed. Although there is still a lot of uncertainty surrounding this, the talks are a step in the right direction.
Let us now discuss a few ETFs focused on providing exposure to Japan (see Asia-Pacific (Developed) ETFs here).
iShares MSCI Japan ETF (EWJ - Free Report)
This fund seeks to provide exposure to Japanese equities with a large-cap focus and follows the MSCI Japan index (read: Country ETFs to be Impacted by Trump's Tariff Plans).
The fund has AUM of $21.9 billion and charges a fee of 49 basis points a year. From a sector look, Industrials, Consumer Discretionary and Technology are the top three allocations of the fund, with 21.2%, 20.3% and 13.0% exposure, respectively (as of Mar 6, 2018). Toyota Motor Corp, Mitsubishi UFJ Financial Group and Softbank Group Corp are the top three holdings, with 4.7%, 2.3% and 1.8% exposure, respectively (as of Mar 6, 2018). It has returned 19.1% in a year. EWJ has a Zacks ETF Rank #1 (Strong Buy), with a Medium risk outlook.
First Trust Japan AlphaDEX Fund (FJP - Free Report)
This fund seeks to provide exposure to Japanese equities with a large-cap focus and tracks the NASDAQ AlphaDEX Japan Index.
The fund has AUM of $148.2 million and charges a fee of 80 basis points a year. From a sector look, Industrials, Consumer Discretionary and Materials are the top three allocations of the fund, with 28.7%, 20.7% and 20.5% exposure, respectively (as of Mar 6, 2018). TDK Corporation, Hitachi Construction Machinery Co., Ltd. and Minebea Co., Ltd are the top three holdings of the fund, with 1.9%, 1.9% and 1.8% exposure, respectively (as of Mar 6, 2018). It has returned 16.8% in a year. FJP has a Zacks ETF Rank #2 (Buy), with a Medium risk outlook.
iShares JPX-Nikkei 400 ETF (JPXN - Free Report)
This fund seeks to provide exposure to Japanese equities with a large-cap focus and tracks the JPX-Nikkei Index 400.
The fund has AUM of $106.6 million and charges a fee of 48 basis points a year. From a sector look, Industrials, Consumer Discretionary and Financials are the top three allocations of the fund, with 22.9%, 18.3% and 11.9% exposure, respectively (as of Mar 6, 2018). Honda Motor Ltd, Sony Corp and Toyota Motor Corp are the top three holdings of the fund, with 1.7% exposure each (as of Mar 6, 2018). It has returned 19.2% in a year. FJP has a Zacks ETF Rank #2, with a Medium risk outlook.
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