Topic: ETFs

Japan keeps overcoming its challenges


The Japanese economy ranks among the top 5 in the world and hosts some of the most profitable global corporations. The economy is, however, hamstrung by a declining and rapidly aging population. Still, an older population also present opportunities, and Japanese companies are already coming up with innovative and technology-driven aids.

Here is one ETF that provides exposure to the top Japanese public companies.

JP MORGAN BETABUILDERS JAPAN ETF $22.40 (New York symbol BBJP; TSINetwork ETF Rating: Aggressive; Market cap: $3.9 billion) tracks the performance of the largest publicly listed Japanese companies.

Industrial companies account for 19.6% of the fund’s assets, while Consumer Cyclical (17.6%), Technology (13.9%), Financial Services (11.6%), Consumer Defensive (8.6%) and Health care (8.2%) are other key segments.

The ETF holds a large portfolio of 383 stocks; the top 10 make up only 18.0% of overall assets. Top holdings include Toyota (consumer cyclical, 4.5%), Mitsubishi UFJ Financial (financials, 1.9%), Softbank (communication, 1.7%), Takeda Pharmaceutical (healthcare, 1.7%), Sony (technology, 6.0%), and Honda (consumer cyclical, 1.5%).

The fund started in June 2018 and its MER is 0.49%. That reflects a fee waiver of 0.30%, but it will remain in place until at least June 2021. Although the ETF was only launched last year, it has already built a large asset base; liquidity is very good, with an average of $31.2 million in units trading daily.

The ETF has a p/e of 11.4 based on the forward earnings of the stocks its holds. It paid a quarterly dividend in December 2018 that amounted to $0.138. Annualized, that represents a yield of 2.4%.

Japan in the modern era

In 1603, following decades of civil war, a dynastic government—the Tokugawa shogunate—ushered in two centuries of political stability and isolation from foreign influence. After the Treaty of Kanagawa, Japan opened its ports in 1854 and embarked an intensive period of modernization and industrialization

During the late 19th and early 20th centuries, Japan became a regional power that was able to defeat the forces of both China and Russia. In 1941, it attacked U.S. forces, which triggered America’s entry into the Second World War. After its total defeat, and with significant levels of support from the U.S., Japan recovered to become an economic power and an ally of its former enemy. The emperor has retained his throne as a symbol of national unity, although elected politicians hold decision-making power.

Japan is relatively small by landmass, consisting of four main islands and 6,848 smaller islands. The country has a large population of 126 million; although, this is the second oldest population in the world (see box on page 26 for more details). The country also has a large labour force of 65 million people, with a very low unemployment rate of 2.9%.

Despite having few natural resources, the economy is among the world’s top five. The lack of natural resources, especially energy, makes the country highly dependent on the import of both oil and gas.

Japan, in fact, remains a powerhouse and ranks among the world’s largest and most technologically advanced producers of motor vehicles, electronic equipment, machine tools and ships; it is the fourth-largest global exporter.

For three postwar decades, overall real economic growth was steady—averaging 10% in the 1960s, 5% in the 1970s, and 4% in the 1980s.

Growth slowed in the 1990s, averaging just 1.7%, largely because of unproductive government spending and the collapse of inflated real estate and stock prices in the 1980s.

Modest economic growth continued after 2000, but the economy has fallen into recession several times since 2008. Japan has enjoyed an uptick in growth since 2013, supported by Prime Minister Shinzo Abe’s “Three Arrows” economic revitalization agenda. Those three pillars are monetary easing, flexible fiscal policy, and structural reform.

Under the Abe Administration, Japan’s government has opened the country’s economy to greater foreign competition and created new export opportunities for Japanese businesses. That includes joining 11 trading partners in the Trans-Pacific Partnership and a trade agreement with the European Union in July 2017.

The government currently faces the challenge of balancing its efforts to stimulate growth and institute economic reforms with the need to address its public debt, which stands at 238% of GDP, the highest in the developed world. The budget deficit also runs at a sizeable 3.5% of GDP. Still, the primary rating agencies continue to award high investment grade credit ratings to Japan.

To help raise government revenue, the nation wants to gradually raise the consumption tax rate. However, the first such increase, in April 2014, led to a sharp economic contraction, so the government has twice postponed the next increase. It is now scheduled for October 2019.

The latest rate of inflation was measured at 0.3%—well below the target rate of 2.0%. The central bank continues to stimulate economic activity with its monetary policy by keeping interest rates very low.

In the short term, the trade dispute between the U.S. and China— two of Japan’s biggest export markets—is a worry. As well, the country imports almost all of its oil, so high oil prices hurt Japan. However, the economy remains sound and corporate earnings keep rising. The high U.S. dollar is also a plus for exporters.

The ETF started in June 2018 and has yet to developd a significant track record. Still, from its inception, it has lost 8.9% compared to the 4.7% loss for the MSCI World Equity Index. Longer term, we expect the ETF to closely track the performance of the broader Japanese market.

For aggressive investors who want exposure to Japan, the JP Morgan BetaBuilders Japan ETF is a sound choice.


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