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Is it the Right Time to Invest in Beaten-Down Japan ETFs?

Sweta Jaiswal, FRM
·4 min read

The world’s third largest economy has finally given investors some respite with better-than-expected rise in factory-output levels in January. The metric inched up 0.8% last month, outpacing analysts’ expectations of a 0.2% increase (per a Reuters poll). However, the data compares unfavorably with a downwardly revised gain of 1.2% in December 2019. Meanwhile, there was a rise in the production of autos and other transport equipments (read: Tough Time for Japan ETFs? COVID-19 Alone Isn't the Culprit).

Let’s see whether the positive factory output data gives us a reason strong enough to invest in the Japan ETFs.

Japan’s Struggling Economy

Japan is moving toward a technical recession this year, as its economy shrunk by an annualized 6.3% during the last quarter of 2019. The reason behind the disappointing results can be traced back to a sales tax hike (from 8% to 10%) last October, which hurt private consumption. Also, Typhoon Hagibis wreaked havoc in some parts of the country the same month, further hurting the economy. The slump was much steeper than the median-market projection of a 3.7% fall. Remarkably, the economy witnessed the sharpest decline in GDP since the second quarter of 2014. With Japan’s economy already struggling for quite some time now, the Coronavirus outbreak poses a serious threat. Impact of the virus is likely to push the economy into recession in first-quarter 2020. Per a Ministry of Economy, Trade and Industry survey, manufacturers are expecting a 6.9% decline in the March output largely due to the impact of the Coronavirus outbreak (read: ETF Strategies to Mark as Covid-19 Flares up Recession Scares).

Economic Fundamentals Look Disappointing

Recently-released data reflects weakness in Japan’s job market and retail sales. The seasonally-adjusted unemployment rate increased to 2.4% in January from December’s 2.2%. Meanwhile, the jobs-to-applicants ratio slumped to 1.49 in January from the prior month’s 1.57. Notably, along with the data release, the government officials informed about a change in the survey methodology that might have influenced these results. Moreover, there was a 0.4% decline in the January retail sales.

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 — down 11.4% year to date

This fund tracks the investment returns of the MSCI Japan Index. It comprises 323 holdings. The fund’s AUM is $11.11 billion and expense ratio, 0.49% (read: Coronavirus Puts These Country ETFs on High Alert).

BBJP — down 11.6%

This fund tracks the investment returns of the Morningstar Japan Target Market Exposure Index. It comprises 375 holdings. The fund’s AUM is $2.93 billion, while the expense ratio stands at 0.19% (read: Japan ETFs to Shine as IMF Lifts Economic Outlook for 2020).

DFJ — down 16.8%

This fund tracks the investment returns of the WisdomTree Japan SmallCap Dividend Index. It consists of 735 holdings. The fund’s AUM is $257.9 million and the expense ratio, 0.58% (read: Top and Flop ETFs of Last Week).

FLJP — down 11.7%

The fund tracks the performance of the FTSE Japan Capped Index. It comprises 502 holdings. The fund’s AUM is $358.5 million and the expense ratio, 0.09%.

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