The Japanese economy is growing more quickly than expected, bolstering the appeal of Japan country-specific exchange traded funds.
Japan’s economy expanded an faster-than-expected annualized 2.4% compared to the previous quarter, reports CNBC. The economy grew 0.6% in the first quarter over the last three months of 2014.
The improved economy helped fuel a surge in the Nikkei Average to a near one-month high of 20,207.
Year-to-date, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) gained 20.1%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) rose 18.6% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) increased 18.4%. [Investors Still Like the Japan ETF Trade]
Greater private consumption is beginning to bolster Japanese gross domestic product, a positive sign in an export oriented economy.
“Consumption ought to accelerate from here. Think about it: if you’ve got 2.3 percent growth in wages, you’ve got a very, very tight job market. So everyone knows, ‘they can’t fire me, they got no one to replace me with,'” Nicholas Smith, a Japan strategist at CLSA, told CNBC. “I’ve placed a lot of weight in my portfolio in retail and that’s been vindicated so far this year. It looks as if the story is very much on track.”
The Japan-related ETFs also have a heavy tilt toward the consumer sectors. For instance, DXJ includes 24.7% in consumer discretionary and 8.9% in consumer staples. HEWJ has 22.0% in consumer discretionary and 6.4% in consumer staples. DBJP includes 22.3% consumer discretionary and 7.0% consumer staples.
Adding to the strength in the yen-hedged Japan ETFs, the Japanese yen currency is weakening against the U.S. dollar. The CurrencyShares Japanese Yen Trust (NYSEArca: FXY), which tracks yen movements against the dollar, fell 0.4% Wednesday and dipped 0.8% over the past week. The yen was trading down to 121.3 against the dollar.
Japanese companies are also revealing record profits at a rate not seen since before the global financial crisis, partly due to the weakening yen and robust earnings from big exporters, reports Megumi Fujikawa for the Wall Street Journal.
“Falls in the yen and oil prices helped some sectors benefit from external demand, such as auto [makers]and steelmakers,” Kayoko Ota, an analyst at SMBC Nikko Securities, said in the WSJ article. “Positive impact from a weaker yen may not accelerate this year, but if the currency stays around ¥120 [against the U.S. dollar], they can maintain solid earnings.”
Investors can also take a targeted yen-hedged approach to Japan’s industries through the WisdomTree Japan Hedged Capital Goods Fund (NYSEArca: DXJC). DXJC includes large exposure to exporters that benefit from a weaker yen, including Toyota 11.0%, Honda 7.8% and Nissan Motor 3.3%. Automobile manufacturers make up 30.8% of DXJC’s portfolio, followed by industrial machinery 22.8% and auto parts & equipment 9.6%.
For more information on Japan, visit our Japan category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.