While Japan’s export growth is slowing, investors who still want to capture an expanding Japanese economy may want to take a look at the domestic market and small-cap exchange traded funds.
Year-to-date, the WisdomTree Japan SmallCap Dividend Fund (NYSEArca: DFJ) rose 14.9%, iShares MSCI Japan Small-Cap ETF (NYSEArca: SCJ) increased 11.8% and SPDR Russell/Nomura Small Cap Japan ETF (NYSEArca: JSC) gained 12.0% while the iShares MSCI Japan ETF (NYSEArca: EWJ) was up 10.3%.
While the U.S. dollar continues to appreciate and the yen currency weakens, with the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) 3.2% lower this year, a small-cap currency-hedged Japan ETF has also outperformed. The WisdomTree Japan Hedged Small Cap Fund (NasdaqGM: DXJS) advanced 17.2% year-to-date while the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) returned 10.6%.
Weighing on Japan’s large-cap category, export growth has slowed down. Japanese export was 7.6%, compared to June’s 9.5% gain, on reduced shipments of cars and electronics to Asia, Reuters reports.
“Exports to Asia look a little sluggish,” HidenobuTokuda, senior economist at Mizuho Research Institute, told Reuters. “There is still time for exports to recover, but as of now they look a little weak. I don’t think we need stimulus measures now, but this could become more likely heading into next year.”
Notably, exports rose 4.2% to China, Japan’s largest trading partner, in July year-over-year, compared to a 5.9% gain in June.
Now, there are concerns that exports to China may further decline after Beijing devalued its currency. Japanese Finance Minister Tara Aso has warned that the government is on guard if China attempts to manipulate its yuan currency any further to give its export industry a competitive advantage, according to Reuters.
“Japan would face a tough decision on how to respond if China intervenes frequently in the market,” Aso told a news conference after a regular cabinet meeting.
Consequently, large-cap Japan ETFs, which largely include major exporting companies like Toyota and Honda, may come under pressure in the ongoing currency war in Asia.
Alternatively, with the Japanese government implementing greater economic reforms, small-caps may continue to outperform. Prime Minister Shinzo Abe is currently enacting his so-called Third Arrow of structural reforms. [Japan Equity ETFs to Capture Abe’s ‘Third Arrow’ Corporate Reforms]
For more information on Japan, visit our Japan category.
Max Chen contributed to this article.