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Japan's Preliminary Q3 GDP Data Disappoints: ETFs in Focus

Sweta Jaiswal, FRM

The world’s third-largest economy has disappointed with the recently-released preliminary GDP data. Japan’s economy grew at an annualized 0.2% in the third quarter of 2019 comparing unfavorably with the revised 1.8% growth in the previous quarter. The metric also lagged the median market forecast for 0.8% growth. Moreover, economic growth in the third quarter is the weakest since a contraction of 2% in the July-September quarter of 2018 (read: Japan Exports Remain Weak: Tough Time for ETFs?).

Factors Causing the Disappointment

Japan’s economy witnessed a slowdown in private consumption levels in the third quarter from the last quarter. The metric rose 0.4% in the quarter in comparison to 0.6% rise in second-quarter 2019. The private consumption levels slumped despite increased demand from households to prepare for the October tax hike.

A 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 faced the brunt of Trump’s trade-related policies over the recent past. This resulted in weaker currencies, soft economic growth and slashed growth forecasts for countries at the receiving end. Accordingly, weak external demand dented third-quarter GDP growth by 0.2%.

Sino-U.S. trade tensions 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. 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).

Moreover, Japan’s trade spat with South Korea has been dampening export levels. The country has been grappling with declining 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. Japan’s GDP also suffered owing to a sharp decline in the number of Korean tourists in August and September. Furthermore, due to weakness in export levels of cars, televisions, computers and semiconductor production equipment, Japanese exports to South Korea declined 16% in September.

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 $14.08 billion and the expense ratio, 0.47%. The fund has returned 17% year to date (read: ETF Asset Report of Last Week: U.S. Stocks a Hit).

BBJP

This fund tracks the investment returns of the Morningstar Japan Target Market Exposure Index. It comprises 376 holdings. The fund’s AUM is $4.54 billion, while the expense ratio stands at 0.19%. The fund has returned 17.9% 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 $464.6 million and the expense ratio, 0.58%. The fund has gained 14.3% year to date.

FLJP

The fund tracks the performance of the FTSE Japan Capped Index. It comprises 504 holdings. The fund’s AUM is $221.5 million and the expense ratio, 0.09%. The fund has gained 16.3% year to date.