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ETFs in Focus on Japan's Consumption Tax Hike

Sweta Jaiswal, FRM

The government of Japan finally raised the consumption tax to 10% from 8% on Oct 1, 2019. Such a move has been implemented for the first time in five years. Escalating social security costs due to ageing population and mounting public debts are believed to be the major reasons behind this step. The government is planning to fund childcare using about half its revenue stream.

For the first time in Japan, tax rates will vary depending on different goods. The newly revised tax rate will be applicable to almost all goods and services except some daily necessaries like food and drinks. However, 10% tax rate will be levied on alcoholic beverages and food items consumed outdoors. Notably, the administration is expected to receive about 5.7 trillion yen or more than $52 billion in tax revenues from the latest hike (read: Japan ETFs Rally on BoJ's Hints of Easing in October).

Japan’s Rate Hikes in the Past

Records show that sales tax increases in the past adversely impacted the spending trend in Japan. Three quarterly economic contractions in less than a year and a half were witnessed when rates were nudged up to 5% from 3% in 1997 followed by Prime Minister Ryutaro Hashimoto losing the polls. Again, following the sales tax rate hike to 8% in 2014, the economy of Japan suffered a downturn of more than 7%. In fact, the Bank of Japan had to intervene and provide more stimulus to improve the economy (read: Play the Yen Bull Market With This ETF).

Will the Trend be Different This Time?

The government of Japan has taken certain measures to avoid any unfavorable blows to the economy from this move. In a bid to promote cashless transactions, the government will be providing a 5% rebate on purchases made using credit cards or electronic payment methods. In this regard, senior research fellow Martin Schulz at the Fujitsu Research Institute has commented that the rebates have been provided “to make the economy more productive".

After the European Central Bank and the Fed, it could be the Bank of Japan, which could come up with further policy easing. In its last meeting, BOJ hinted at the possibility of more stimulus as early as its next policy meeting in October to keep economic growth risks at bay.

However, rate hikes have come at a time when Japan is struggling with its weak export levelsincluding electronic equipment and car parts along with a global economic slowdown majorly due to Sino-US trade tiff. Moreover, per a Bloomberg survey, analysts are expecting the economy of Japan to contract by an annualized 2.7% in fourth-quarter 2019.

ETFs in Focus

Against this backdrop, investors can keep tabs on a few Japan ETFs like iShares MSCI Japan ETF EWJ, JPMorgan BetaBuilders Japan ETF BBJP, WisdomTree Japan SmallCap Dividend Fund DFJ and Franklin FTSE Japan ETF FLJP.

EWJ

This fund tracks the investment returns of the MSCI Japan Index. It comprises 323 holdings. The fund’s AUM is $11.62 billion and the expense ratio, 0.47%. The fund has returned 11.9% year to date (read: Country ETFs to Top/Flop on Saudi Attack).

BBJP

This fund tracks the investment returns of the Morningstar Japan Target Market Exposure Index. It comprises 376 holdings. The fund’s AUM is $4.14 billion while the expense ratio stands at 0.19%. The fund has returned 12.4% year to date (read: ETFs in Focus on Japan's Dull Preliminary Manufacturing Data).

DFJ

This fund tracks the investment returns of the WisdomTree Japan SmallCap Dividend Index. It consists of 763 holdings. The fund’s AUM is $428.9 million and the expense ratio came in at 0.58%. The fund has gained 6.8% year to date.

FLJP

The fund tracks the performance of the FTSE Japan Capped Index. It comprises 502 holdings. The fund’s AUM is $209.9 million and the expense ratio, 0.09%. The fund has gained 10.8% year to date.

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iShares MSCI Japan ETF (EWJ): ETF Research Reports
 
WisdomTree Japan SmallCap Dividend Fund (DFJ): ETF Research Reports
 
JPMorgan BetaBuilders Japan ETF (BBJP): ETF Research Reports
 
Franklin FTSE Japan ETF (FLJP): ETF Research Reports
 
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