Despite robust accommodative measures, the Japanese economy is suffering from slow growth and has been weighed down by weak exports and business investment, diminishing the outlook for Japan country-specific exchange traded funds.
Japan’s economy stalled in the second quarter, expanding an annualized 0.2% in the April through June quarter, compared to the 2% expansion in the first three months of the year, reports Eleanor Warnock for the Wall Street Journal.
The economy would have actually contracted over the quarter if the government had not front-loaded infrastructure spending. Prime Minister Shinzo Abe’s administration approved a ¥28 trillion, or $276 billion, stimulus package that includes ¥15,000 handout to 22 million low-income people, so spending should extend into the latter part of the fiscal year.
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“I expect exports to remain slow ahead, but for more public spending to support growth,” Hidenobu Tokuda, an economist at Mizuho Research Institute, told the WSJ. “Fundamentally, Japan’s growth potentially has fallen. That means the government needs to continue with structural reforms, not just stimulus.”
Exports declined an annualized 5.9%, with exports of ships, steel product and oil-related goods falling. Meanwhile, U.S. and European demand for Japanese products diminished.
Weighing on the Japanese export industry, the yen currency appreciated against other major currencies since the start of the year. The U.S. dollar is now trading at ¥101.23, compared to ¥120 at the start of the year.
Consumer spending also stalled over the quarter. Consumers makes up about 60% of Japan’s gross domestic product and they may have held back on spending due to the lack of significant wage increases, despite record earnings at many large companies.
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Additionally, business investment decreased for the second straight quarter.
Year-to-date, the non-hedged iShares MSCI Japan ETF (NYSEArca: EWJ) gained 2.5% while the CurrencyShares Japanese Yen Trust (NYSEArca: FXY) rose 18.4%.
Meanwhile, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) declined 16.0%, iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) decreased 14.4% and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) dropped 14.4%. The currency-hedged ETFs outperform non-hedged funds when the local currency depreciates against the U.S. dollar, but these funds have been underperforming as the JPY surged against the USD this year.
ETF investors have been pulling out of the currency-hedged Japan play as the yen continues to appreciate. For example, DXJ saw $281.8 million in net outflows over the past week and experienced $5.2 billion in outflows year-to-date, according to ETF.com.
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iShares MSCI Japan ETF