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Japan Exports Remain Weak: Tough Time for ETFs?

Sweta Jaiswal, FRM

The world’s third-largest economy Japan has seen a decline in exports for the tenth straight month in September. Per data from the Ministry of Finance, exports fell 5.2% year over year in comparison to a 4% fall projected by economists. In the terms of volumes, Japanese exports declined 2.3% between January and September.

Moreover, imports in September fell 1.5% year over year against a median estimate of a fall of 2.8%. Notably, Japan’s economy recorded a trade deficit of around 123 billion yen in the month in comparison to an estimated trade surplus of 54 billion yen. Meanwhile, in terms of volume, imports rose 6.8% majorly because of front loading of demand prior to the government of Japan raising the consumption tax to 10% from 8% on Oct 1 (read: Low-Volatility ETFs to Buy as IMF Cuts Global Growth Outlook).

What’s Causing the Disappointment?

Lower export volumes of auto and airplane parts to the United States and South Korea-bound semiconductor production equipment primarily led to the disappointing September performance for Japan. In fact, overall export levels for auto parts had declined by 14.7% along with a 12.9% fall for semiconductor production equipment.

Meanwhile, Sino-US trade tensions have dealt a blow to China’s economy. The country’s third-quarter economic growth slipped to the lowest in almost three decades. Analysts are apprehensive about waning demand, thanks to a slump in China imports. Resultantly, Japan exports to its biggest trading partner — China — declined 6.7% year over year in September, marking the seventh month of a drop. Increased Japan shipments of electronic chips for semiconductors were offset by a decline in export levels of auto parts to China.

Meanwhile, Japanese exports to the United States declined 7.9% from January to September 2019, largely due to reduced shipments of cars over 3000cc along with aircraft motors and parts. There was an 11.6% fall in Japan’s imports from the United States in September. Naturally, Japan’s trade surplus with America contracted 3.5% year over year to 564.1 billion yen ($5.2 billion) (read: ETFs in Focus as China's GDP Nears 30-Year Low Level).

slowdown in global economic growth is being observed with Trump making rampant attacks to defend his America First agenda. Countries like China, Mexico, India and Turkey, have faced the brunt of Trump’s trade-related policies over the recent past. This has resulted in weaker currencies, soft economic growth and slashed growth forecasts for the countries at the receiving end. Notably, Asia-bound exports, which account for more than half of Japan's total exports, fell 7.8% from January to September 2019. 

Moreover, Japan’s trade spat with South Korea has been dampening export levels. The country has been grappling with falling export levels of South-Korea bound semiconductor production equipment. Japan 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. Moreover, the countries have removed each other’s names from their list of trusted trade partners.

ETFs in Focus

Against this backdrop, investors can keep a tab on 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 $12.38 billion and the expense ratio, 0.47%. The fund has returned 13.2% year to date (read: ETFs in Focus on Japan's Consumption Tax Hike).

BBJP

This fund tracks the investment returns of the Morningstar Japan Target Market Exposure Index. It comprises 376 holdings. The fund’s AUM is $4.22 billion while the expense ratio stands at 0.19%. The fund has returned 13.8% year to date (read: Japan ETFs Rally on BoJ's Hints of Easing in October).

DFJ

This fund tracks the investment returns of the WisdomTree Japan SmallCap Dividend Index. It consists of 762 holdings. The fund’s AUM is $437.5 million and the expense ratio came in at 0.58%. The fund has gained 9% year to date.

FLJP

The fund tracks the performance of the FTSE Japan Capped Index. It comprises 503 holdings. The fund’s AUM is $211.6 million and the expense ratio, 0.09%. The fund has gained 12.1% 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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