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What's Behind the Surge in Japan ETFs?

Sanghamitra Saha
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Japan's economy expanded the fastest in the second quarter of 2018 since 2016, courtesy of higher-than-estimated capital spending. However, U.S.-Sino trade tensions has been a drag.

The economy grew an annualized 3.0% in April-June, surpassing economists' median estimate of 2.6% growth. It followed a 0.9% shrinkage in the first quarter. The capital expenditure component of GDP grew 3.1% sequentially in Q2 versus the median forecast of 2.8% growth. This marked the fastest increase since the start of 2015.

Also, the monetary policy remained easy unlike several key global central banks like the Fed and the ECB, which are on track to policy tightening. The Bank of Japan kept its key short-term interest rate unchanged at -0.1% at its September 2018 meeting, as widely expected. Policymakers also kept the 10-year government bond yield target at around 0% (as part of its quantitative and qualitative monetary easing with yield curve control or QQEYCC) (read: Kuroda Enters Second Term: Japan ETFs in Focus).

Policymakers also reaffirmed the view that the economy will expand modestly on robust global demand. The central bank also maintained the new forward guidance, issued in July, that agrees to keep interest rates extremely low for a protracted period.

Japan inflation is yet to rise markedly. The country’s year-over-year consumer price inflation was 0.9% in July. Though it was above market consensus of 0.4% and was the highest since March, tepid inflation is basically compelling the BoJ to extend its massive stimulus.

The continuation of the easy money policy has possibly boosted the equity market of Japan. Most of the Japan ETFs are near a one-month high, rising considerably on Sep 18 backed by the BoJ’s decisions and outlook (read: 5 Reasons to Buy Japan ETFs).

Here we highlight a few of the Japan ETFs that saw sizeable gains on Sep 18.

ETFs in Focus

Wisdomtree Japan Financials Hedged Fund DXJF — Up 3.3%

First Trust Japan AlphaDEX ETF FJP — Up 3.1%

Wisdomtree Japan Smallcap Equity Hedged Fund DXJS — Up 3.1%

Japan Hedged Equity Wisdomtree DXJ — Up 3.1%

iShares Currency Hedged MSCI Japan ETF HEWJ — Up 3.0%

What Lies Ahead?

Floods, typhoons and an earthquake wreaked havoc on the Japan economy in the third quarter, disruptingbusiness and consumer activity. So, along with several analysts, we believe this could be a concern this quarter.

If growth is affected, we can expect few more days of cheap money inflow from the BoJ, which in turn may keep yen low and boost Japan ETFs. This is because the country has an export-oriented economy and a weaker currency makes its exports more competitive (read: Currency ETFs Winners & Losers on Turkey Crisis).

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WISDMTR-J HEF (DXJ): ETF Research Reports
WISDMTR-JP HFF (DXJF): ETF Research Reports
ISHA-CH MS JAP (HEWJ): ETF Research Reports
WISDMTR-JP HSCF (DXJS): ETF Research Reports
FT-JAPAN AD (FJP): ETF Research Reports
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