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ETFs in Focus on Japan's Dull Preliminary Manufacturing Data

Sweta Jaiswal, FRM

Japan’s economy has been grappling with tough external conditions which have taken a toll on its manufacturing sector. Stretching for the fourth month, the world’s third-largest economy witnessed weakness in the manufacturing sector as evident from the recently-released preliminary results.

Notably, in August 2019, the Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index increased to a seasonally adjusted 49.5 in comparison to 49.4 in July. However, the PMI remained below 50, indicating contraction. Meanwhile, the Jibun Bank Flash Japan Composite PMI came in at 51.7 as against 50.6 in July (read: US-Japan Trade Meeting Begins: ETFs in Focus).

What’s Behind the Bleak Data?

Japan has been witnessing a slump in factory output and total new orders. The export levels have also been declining, with July marking the eighth month of decrease. It is largely believed that the lower export volumes of semiconductor components, and China-bound car parts primarily led to the disappointing June performance for Japan. There was a 1.6% year-over-year decline in export levels. Moreover, a Reuters Tankan survey showed that Japanese manufacturers’ confidence turned negative for the first time since April 2013.

Meanwhile, escalating Sino-US trade tensions have weakened China’s economy. Analysts are apprehensive about waning demand, thanks to a slump in Chinese imports. Resultantly, Japanese exports to its biggest trading partner — China — have declined 9.3% year over year in July, marking the fifth consecutive month of a drop. The downside was largely due to a 31.5% fall in semiconductor production equipment, 35% decrease in car parts and 19% drop in electronics parts.

Here, it is worth noting that Trump recently announced plans to delay tariffs on certain goods in the list of $300 billion of Chinese imports that were subject to 10% tariffs from Sep 1 until Dec 15. Per a Reuters article, U.S. tariffs will now be implemented on more than $125 billion worth of Chinese imports starting Sep 1.

A slowdown in global economic growth is being observed with Trump making rampant attacks to defend his America First agenda. This has resulted in weaker currencies, soft economic growth and slashed forecasts for the countries at the receiving end. Notably, Asia-bound exports, which account for more than half of Japan's total exports, fell 8.3% from January to July 2019.

Japan is also locked in a trade spat with South Korea. Japanese exporters are now required to apply for licenses for certain individual shipments to South Korea of items like chemicals, used mostly for producing refrigerants, pharmaceutical intermediates, metals production, and sometimes semi-conductor preparations.In turn,the South Korean government is planning to revoke Japan’s preferred trade partner status from September 2019.

Moreover, Japan is struggling with raised U.S. steel and aluminum tariffs. Investors should note that Japan’s trade surplus with the U.S. economy rose 8.4% from January to July 2019. Probably this is why the Trump administration is said to have been pressurizing Japan to increase its imports from the United States on the grounds of Trump’s efforts to end unfair trade practices. Japan may also be asked to cut down its auto exports to the United States.

A two-day meet between Japan’s Minister of Economy Toshimitsu Motegi and U.S. Trade Representative Robert Lighthizer is in process. The trade representatives will try to construct a deal that can be signed by Trump and Abe before they meet for the U.N. General Assembly meeting in New York in late September.

Is the Picture all Dull?

There are some bright spots in the recently-released preliminary data which cannot be ignored. Japan’s service sector continued to show resilience to tough external conditions and reached the highest level since October 2017. On a seasonally adjusted basis, the Jibun Bank Flash Japan Services PMI rose to 53.4 in August as against a final 51.8 in July. Strong domestic demand kept the service sector strong.

Meanwhile, there was a 1.5% year-over-year rise in export volume in July along with a rise in employment levels. It is being believed that a strong service sector might continue to moderate the adverse impacts on overall GDP owing to weakness in manufacturing activities. Meanwhile, complicating the situation, the Japanese government is prepared to raise sales tax from 8% to 10% in October.

ETFs in Focus

Against this backdrop, investors can keep a tab on a few Japan ETFs like iShares MSCI Japan ETF EWJ, JPMorgan BetaBuilders Japan ETF BBJP, WisdomTree Japan Hedged Equity Fund DXJ and WisdomTree Japan SmallCap Dividend Fund DFJ.

EWJ

This fund tracks the investment returns of the MSCI Japan Index. It comprises 323 holdings. The fund’s AUM is $12.12 billion and expense ratio is 0.47%. The fund has returned 5.3% year to date (read: Asian Shares Tumble on Recessionary Fears: ETFs in Focus).

BBJP

This fund tracks the investment returns of the Morningstar Japan Target Market Exposure Index. It comprises 377 holdings. The fund’s AUM is $3.81 billion and expense ratio is 0.19%. The fund has returned 5.7% year to date (read: Japanese Exports Under Pressure: Tough Time for ETFs?).

DXJ

This fund tracks the investment returns of the WisdomTree Japan Hedged Equity Index. It comprises 305 holdings. The fund’s AUM is $2.50 billion and expense ratio is 0.48%. The fund has lost 0.3% year to date.

DFJ

This fund tracks the investment returns of the WisdomTree Japan SmallCap Dividend Index. It comprises 764 holdings. The fund’s AUM is $403.5 million and expense ratio is 0.58%. The fund has lost 0.6% year to date.

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WisdomTree Japan SmallCap Dividend Fund (DFJ): ETF Research Reports
 
WisdomTree Japan Hedged Equity Fund (DXJ): ETF Research Reports
 
iShares MSCI Japan ETF (EWJ): ETF Research Reports
 
JPMorgan BetaBuilders Japan ETF (BBJP): ETF Research Reports
 
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