Japan ETFs have stayed steady in the past one month (as of Sep 18, 2023). iShares MSCI Japan Value ETF EWJV has been the winner with 7.7% returns followed by WisdomTree Japan Hedged Equity Fund DXJ (up 7.2%), First Trust Japan AlphaDEX Fund FJP (up 5.8%) and Franklin FTSE Japan Hedged ETF FLJH (up 5.8%). Let’s delve a little deeper (read: Japan’s GDP Growth Beats Expectations: ETFs to Play).

Behind the Economic Scenario

The BoJ raised its median forecast for inflation to 2.5% for fiscal 2023 in late-July, up from the previous prediction of 1.8% in April. The Bank of Japan (boJ) took a significant step recently by allowing long-term interest rates to rise.

The BoJ’s recent policy will now allow 10-year Japanese government bond (JGB) yields to fluctuate around the 0% target level within a range of approximately plus and minus 0.5 percentage points. While many viewed the stance as a start of the policy tightening, investors should not forget that key rates are still held at record-low levels. This is a favorable scenario for equity investing.

Shift-Away from Deflation

The recent stock rally was fueled by rising inflation and interest rates, as well as a resurgence in local consumer demand. As the shift away from deflation gains momentum, there is growing anticipation of boosted earnings.This boost is expected to come from the passing on of increased labor and raw material expenses to product prices. Additionally, there are expectations for elevated real estate values and expanded profit margins.

Companies operating in sectors such as dining establishments, property management, and financial institutions, among others, are experiencing significant growth. Property developers Mitsubishi Estate and Nomura Real Estate Holdings both hit year-to-date highs lately on the prospect that inflation will continue to boost real estate prices, and thus earnings.

Policy Easing in China

China is Japan’s biggest trading partner. Hence, the recent rollout of economic measures in the ailing Chinese economy went in favor of the Japan investing. In an effort to bolster the struggling property sector and counter its adverse impact on the economy, China has introduced new measures to shore up the ailing sector. This, in turn, has probably boosted its trading partners (read: China ETFs in Better Shape on Property Support: Can the Rally Last?).

Can the Rally in Japan ETFs Last?

The Nikkei 225 Index retreated from 11-week highs on Sep 18, 2023 as investors turned cautious ahead of key central bank events this week. The Bank of Japan will announce its monetary policy decision on Friday, where investors will look for cues related to a likely end to ultra-loose monetary policy.

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WisdomTree Japan Hedged Equity ETF (DXJ): ETF Research Reports

First Trust Japan AlphaDEX ETF (FJP): ETF Research Reports

Franklin FTSE Japan Hedged ETF (FLJH): ETF Research Reports

iShares MSCI Japan Value ETF (EWJV): ETF Research Reports

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