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Are Japan ETFs in Trouble as BOJ Sees Shrinking Economy?

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Japan continues to battle the coronavirus pandemic as the total number of confirmed cases soars above 13,000. The world’s third-largest economy declared a state of emergency on Apr 7 that will stretch until May 6. Prime Minister of Japan, Shinzo Abe, announced the state of emergency in the capital Tokyo and six other prefectures — Chiba, Kanagawa and Saitama, the western hub of Osaka, and neighboring Hyogo, and the southwestern region of Fukuoka. Together, these make about 44% of Japan's population and represent about half of the nation’s economy.

However, the state of emergency order was expanded on Apr 16 to cover all 47 prefectures. Notably, 13 prefectures were labelled as requiring “special vigilance” (per an article on The Japan Times). Also, Japan’s government might have to extend the orders depending on the number of coronavirus cases reported during the Golden Week holiday period.

The pandemic is sparking fears of a global economic recession among investors as the outbreak is disrupting global supply chains owing to the shutdown of economic activities. In the current scenario, Bank of Japan (BOJ) predicts the country’s economy to shrink by 3-5% in 2020 as against earlier forecasts of growth between 0.8% and 1.1% for the ongoing year, per a CNN report. Moreover, Japan’s economy is expected to shrink an annualized 3.7% in January-March and 6.1% in April-June (per a Reuters’ Mar 30-Apr 6 poll).

State Of Emergency’s Impact on Economy

With the emergency declaration, local officials will have the right to take initiatives cancelling of events, limiting use of facilities, such as schools and movie theatres, and allowing land or buildings for usage as temporary medical facilities.

The declaration of the state of emergency has raised concerns regarding the output that is expected to decline by as much as 20% in the current quarter, per a Bloomberg article. Consumer spending will likely be hit by roughly $23 billion along with a 0.4% decline in Japan’s annual GDP (per a recent report by an analyst at Nomura Research Institute). In addition, economists at Goldman Sachs expect Japan’s economy to shrink 25% this quarter, per a Bloomberg article.  Moreover, the analysts project a 60% decline in exports in the quarter, per the report.

BOJ Measures to Fight the Pandemic

In order to combat the ill-effects of the coronavirus pandemic, Japan has rolled out a massive stimulus package worth 108 trillion yen ($990bn) or equivalent to 20% of the nation’s economic output. Moreover, BOJ plans to purchase an additional 15 trillion yen ($140 billion) of commercial paper and bank loans, per a CNN report. It is also lifting limitations on purchases of Japanese government bonds by scrapping an annual cap of 80 trillion yen ($745 billion), according to the report. The move will allow it to purchase an unlimited amount of government bonds.

ETFs at Risk

Against this backdrop, investors can keep a tab on Japan ETFs like iShares MSCI Japan ETF (EWJ - Free Report) , JPMorgan BetaBuilders Japan ETF (BBJP - Free Report) , WisdomTree Japan SmallCap Dividend Fund (DFJ - Free Report) , Franklin FTSE Japan ETF (FLJP - Free Report) and iShares MSCI Japan Small-Cap ETF (SCJ - Free Report) .

EWJ 

This fund tracks the investment returns of the MSCI Japan Index. It comprises 322 holdings. The fund’s AUM is $8.98 billion and expense ratio, 0.49% (read: Is it the Right Time to Invest in Beaten-Down Japan ETFs?).

BBJP 

This fund tracks the investment returns of the Morningstar Japan Target Market Exposure Index. It comprises 374 holdings. The fund’s AUM is $2.63 billion, while its expense ratio stands at 0.19%.

DFJ 

This fund tracks the investment returns of the WisdomTree Japan SmallCap Dividend Index. It consists of 741 holdings. The fund’s AUM is $234.3 million and the expense ratio, 0.58%.

FLJP 

The fund tracks the performance of the FTSE Japan Capped Index. It comprises 506 holdings. The fund’s AUM is $348.7 million and the expense ratio, 0.09%.

SCJ

The fund tracks the MSCI Japan Small Cap Index. It comprises 973 holdings. The fund’s AUM is $61 million and the expense ratio, 0.49%.

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