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Should You Tap Japan ETFs on Strong Retail Sales in October?

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The Japanese economy is showing signs of pickup as retails sales in the month of October grew the fastest since December 2017. Retail sales happen to be a gauge for the strength of private consumption, which accounts for about 60% of the Japanese economy.

Sales were up 3.5% on an annual basis beating the median estimate of 2.7% and the revised September sales growth of 2.2%.  On a monthly basis, sales grew 1.2% in October over 0.4% sales growth in the month of September. This leap happens to be the fifth straight month of successive monthly gains and the biggest surge since the month of June.

The Japanese economy experienced 1.2% annual contraction in the third quarter, following robust 3% annualized growth in the second quarter. Natural disasters and sluggish exports were the factors pulling the pace of economy down.

Marcel Thieliant, senior Japan economist at Capital Economics, believes that the recent stumble in the economy was attributable to a couple of natural disasters which discouraged consumers to visit shops. Per Thieliant, if retail sales volumes remain unchanged for the months of November and December, sales volume would rise 1% across the fourth quarter with private consumption rebounding by 0.5%.

Investors should note that many economists saw the third-quarter recession as a temporary phase, but sounded concerned regarding the steep fall in exports. Exports in the third quarter fell by 1.8% on a quarter-over-quarter basis—marking the fastest decline in more than three years.

The ongoing U.S-Sino trade war and slowing global demand is affecting the export-reliant Japan. Per a preliminary survey released on Nov 26, manufacturing activity in November expanded at the slowest pace in two years while new orders dipped for the first time since September 2016 (read: US-Sino Trade War Escalates: Most Vulnerable Sector ETFs).

Per a recently published report by International Monetary Fund (IMF), Japan’s ageing and shrinking population could make the country’s gross domestic product suffer more than 25% in the next 40 years.  The organization has suggested a number of structural reforms, which coupled with corporate governance reforms and trade liberalization, could "boost real GDP by as much as 15% in 40 years," in comparison to the baseline view.

Against this backdrop, below we highlight Japanese ETFs in detail. Despite the recession in the third quarter, these ETFs have been performing well over the past four weeks (as of Nov 28) (see: all the Asia-Pacific (Developed) ETFs here).

iShares MSCI Japan ETF (EWJ - Free Report)

The fund tracks the MSCI Japan Index and comprises 322 holdings. It has AUM of $16.8 billion and expense ratio of 0.49%. The fund has returned 1.2% over the past four weeks.

WisdomTree Japan Hedged Equity Fund (DXJ - Free Report)

 The fund tracks the WisdomTree Japan Hedged Equity Index and comprises 259 holdings. It manages an asset base of $4.8 billion and has expense ratio of 0.48%. It has returned 0.7% over the past four weeks (read: Japan Economy Shows Signs of Improvement: ETFs in Focus).

JPMorgan BetaBuilders Japan ETF (BBJP - Free Report)

The fund tracks the Morningstar Japan Target Market Exposure Index. It comprises 385 holdings. The fund’s AUM is $2.6 billion and expense ratio is 0.19%. It has returned 1.3% over the past four weeks.

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

The fund tracks the MSCI Japan 100% Hedged to USD Index. The fund manages an asset base of AUM is $1.05 billion and expense ratio is 0.49%. It has returned 1.9% over the past four weeks.

WisdomTree Japan SmallCap Dividend (DFJ - Free Report)

The fund tracks the WisdomTree Japan SmallCap Dividend Index and comprises 763 holdings. The fund’s AUM is $882.9 million and expense ratio is 0.58%. It has returned 1.9% over the past four weeks.

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