Japan’s economy demonstrated remarkable resilience in Q2, defying projections with a robust growth of 6.0% on an annualized basis. This translated into a striking quarterly gain of 1.5%, far surpassing median estimates of 0.8% in a Reuters poll, as quoted on CNN. This surge propelled the nation’s gross domestic product (GDP) to reach an all-time high.

Export-Driven Momentum and Record High GDP

The most recent expansion marks the fastest growth since the fourth quarter of 2020, following a revised 3.7% expansion observed in the January to March period. Contributing significantly to this growth trajectory was the momentum generated by exports. The expansion in exports during the second quarter, which measured 3.2%, was primarily spearheaded by the automobile industry and the upsurge in inbound tourism.

Japanese automakers benefited from a weakened yen, bolstering their profitability amidst declining sales in the Chinese market and the challenging transition towards electric vehicles. Additionally, robust demand from the United States and Europe further propelled the export sector, complemented by a surge in foreign tourists in the post-Covid era.

Export Surge Offsets Post-Covid Consumer Recovery Slump

While the headline GDP figures offer a sense of relief to policymakers focused on sustaining economic growth and achieving stable inflation, a more detailed analysis reveals underlying vulnerabilities within the household sector. Private consumption, accounting for over half of the economy, exhibited a quarterly decline of 0.5% during Q2. This contraction can be attributed to price increases affecting sales of essential commodities and household appliances.

Export-Driven Momentum: Short-Lived Growth?

Investors should note that real wages in Japan have turned positive for the first time in seven quarters, and corporate appetite for investment remains strong. Yet, concerns loom regarding the potential downsides emanating from the global economy and the impacts of recent price hikes.

Marcel Thieliant, Head of Asia-Pacific at Capital Economics, casts doubt on the sustainability of the export-driven growth momentum, the CNN article indicated. He asserts that although there was a bounce-back in capital goods exports, a vigorous recovery is unlikely. The substantial declines in overseas investments are likely to dampen the prospects of consistent growth.

Then again, we believe that if the United States and other economies manage a soft landing, export growth may remain steady. The Chinese economy is undergoing a slowdown now, which may result in lower demand for energy. If such a thing happens, global inflation may cool down too and global economic growth may brighten up.

Still-Easy Monetary Policy Despite BoJ’s Gradual Policy Shift

The Bank of Japan (boJ) took a significant step last month 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.

ETFs to Play

Against this backdrop, below we highlight that below-mentioned Japan ETFs have displayed better performances in the pack in the past week and may be up for gains in the near term.

WisdomTree Japan Hedged Equity Fund (DXJ) – Down only 0.6% Past Week

Franklin FTSE Japan Hedged ETF FLJH – Down only 0.7% Past Week

Xtrackers MSCI Japan Hedged Equity ETF DBJP – Down only 0.9% Past Week

iShares Currency Hedged MSCI Japan ETF HEWJ – Down only 0.9% Past Week
WisdomTree Japan Hedged Equity ETF (DXJ): ETF Research Reports

iShares Currency Hedged MSCI Japan ETF (HEWJ): ETF Research Reports

Xtrackers MSCI Japan Hedged Equity ETF (DBJP): ETF Research Reports

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

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