By ETF Heat Map Team
Industrial production in Japan modestly climbed to new highs during the month of August, in the third quarter of 2016, and offered a renewed beacon of hope to a mature but economically struggling country facing ongoing growth and development challenges both at home and with trade partners abroad.
On the contrary, consumer prices continued their descent for the sixth straight month and Japanese households also reduced personal spending. These two measures went against the efforts of the Bank of Japan (BOJ) Governor Haruhiko Kuroda who is trying to stimulate for a 2% annual inflation and economic growth in country that observed negative interest rates.
Yuichi Kodama, the chief economist at Meiji Yasuda Life Insurance Co. in Tokyo, recently stated that, “Japan’s economy will probably continue to recover in the third quarter but growth momentum will likely be weak. There is no change to the picture that Japan’s economy lacks a driver to spur growth.”
Industrial output in Japan grew by 1.5% during August when only 0.5% was expected. Comparatively, household spending declined 4.6% and consumer prices, which is the Bank of Japan’s inflation gauge, dropped by 0.5% from a year earlier. Both the household spending and consumer prices declined by more than what was forecasted, while the unemployment rate remained steady at 3.1%. The strong performance of the yen and limited wage growth are blamed for lower corporate profits, lower import prices, and reduced consumer spending.
ETFs can help investors gain exposure to the Japanese market so that everyone can potentially increase their portfolio diversification while positioning themselves to enjoy any possible forthcoming growth opportunities in Japanese equities, and the Japanese market at large. The BlackRock iShares JPX-Nikkei 400 ETF, listed as JPXN, has an expense ratio of 0.48% and provides investors exposure to both large and middle cap Japanese equities listed in the Nikkei 400.
Japanese ETFs worth exploring include:
- JPXN – iShares JPX-Nikkei 400 ETF
- DXJ – WisdomTree Japan Hedged Equity Fund
- DBJP – Deutsche X-trackers MSCI Japan Hedged Equity ETF
- EWJ – iShares MSCI Japan ETF
Looking forward, the BOJ is shifting its focus from monetary stimulus, which was in the form of quantitative easing that expanded the money supply and allowed the BOJ to buy Japanese bonds and ETFs, to controlling interest rates and possibly pursuing alternative fiscal policies to help spur new growth in a country that appears to have become stagnant and where deflation pressures loom on the horizon. Policy makers are focused on wanting to obtain sustainable growth for Japan by overcoming any possibility of deflation or economic contraction.
The government and central bank are hoping to start the transformation by making a continued gradual recovery in industrial production. Production is forecasted to rise 2.2% and 1.2% from the previous month in September and October, respectively. From a year earlier, industrial output increased to 4.6% while the previously forecasted increase was only 3.4%. Consumer prices, excluding food and energy items, overall rose 0.2% with the added exception of Tokyo where prices declined by -0.1%. Masaki Kuwahara, senior economist at Nomura Securities Co., suggests that a lower consumer price index serves as a potential “warning signal to the BOJ and (this) could lead to increased pressure to ease further.”
On a more optimistic note, a recent Capital Economics outlook article published on September 30th stated that, “Japanese manufacturers continue to increase production in their overseas subsidiaries. However, only a fraction of the goods produced overseas are re-imported to Japan. With the overall importance of manufactured goods imports on the rise, inflation has become more sensitive to exchange rate movements in recent years.” Japan needs to take this new journey towards growth one step at a time, and the Japanese government, central bank, and policy makers need to support this economic shift by strategically positioning and pivoting Japanese firms and the Japanese yen for success in Asia and the global markets.