While new economic data reveals Japan has entered its first technical recession in five years, Japanese country-specific exchange traded funds strengthened along with the broader market.
Japan’s gross domestic product shrank at an annualized 0.8% in the July-September period from the previous quarter, after a revised 0.7% contraction in the second quarter, reports Mitsuru Obe for the Wall Street Journal.
Japanese government officials also remained optimistic and confident that a recovery was already under way, especially as a dip in inventories was the major drag on the economy. A drop in inventories cut 2.1 percentage points from total growth. This could turn positive in coming months as companies usually raise output when inventories are low, which can lead to faster growth for the quarters ahead.
“Of course I believe the economy will return to positive growth in the fourth quarter,” Economy Minister Akira Amari said.
Despite the economic update, Japan country-specific ETFs advanced on hopes that the weaker growth data may be countered by further stimulus. For instance, Amari stated that a fiscal stimulus package may be implemented by the end of the year to help the poor and provide more child-care facilities for working parents. The package is expected to total ¥3 trillion, or $25 billion.
The iShares MSCI Japan ETF (NYSEArca: EWJ) was 1.0% higher Monday.
However, the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) dipped 0.5% on the weaker economic overview.
Meanwhile, currency hedged ETFs, which diminished the negative effect of a weaker yen currency, outpaced non-hedged funds. For instance, on Monday, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) rose 1.4%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) increased 1.3% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) gained 1.5%.
Additionally, more easing may help smaller Japanese companies outperform their larger counterparts. Investors seeking small-cap exposure can turn to the WisdomTree Japan Hedged Small Cap Fund (NasdaqGM: DXJS), which also tries to diminish currency risk. DXJS was up 1.4% Monday.
However, ruling Liberal Democratic Party lawmaker Kozo Yamamoto has warned that the Bank of Japan may not offer further easing this year in light of uncertainty surrounding the U.S. Federal Reserve’s rate hike decision, reports Yuya Shino for Reuters. [Central Banks Complicate Capturing Japan ETF Returns]
“If the U.S. Federal Reserve raises interest rates this year, that could accelerate yen declines. That would hurt households” by pushing up imported food costs, Yamamoto told Reuters. “The BOJ will probably stand pat for the rest of this year” to scrutinize how a rate hike could affect yen moves.
iShares MSCI Japan ETF
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Max Chen contributed to this article.