Focus On Small Cap ETFs For Japan Exposure

After two years of strong growth, Japan failed to sustain its longest stretch of economic expansion since the 1980s, indicating a major blow to Prime Minister Shinzo Abe’s Abenomics. The world's third-largest economy contracted 0.6% in the first quarter of 2018, more than the expected 0.2% decline.

Lower business and household spending, the largest drivers of economic growth, were a drag. Higher vegetable prices due to bad weather have curtailed consumer spending in Japan. Additionally, export growth has lost momentum expanding just 0.6% in the first quarter after growth of 2.2% in the fourth quarter of 2017 thanks to weaker global demand for semiconductors and electronic parts.

However, many economists believe that the slowdown in the first quarter was temporary and that the Japanese economy will return to growth in the ongoing quarter. The could be easily depicted in solid manufacturing PMI data, which showed that business activity expanded at a faster pace in April as output and domestic demand picked up. The final PMI index climbed to 53.8 in April from 53.1 in March while the final index for new orders rose to 53.8 from 53.1. This indicates that the economy is recovering from a rough patch seen in the first quarter (read: 4 Reasons Why You Should Look at Japan ETFs Now).

Additionally, economic fundamentals look robust with rising wages and higher corporate profits. Inflation-adjusted real wages rose for the first time in four months in March, signaling a gradual increase in salaries that would stimulate consumer spending and give a boost to the economy. Corporate profits for the Japanese companies jumped 27% in the fiscal year ending in March – representing the second straight year of record profits. The big U.S. corporate tax cut will continue to accelerate corporate profits this year as well.

Moreover, Bank of Japan (BOJ) left its super-easy monetary era policies intact, indicating cheap money flows for some more months. Per the Reuters poll, more than half of the economists expect the BOJ to delay policy normalization until 2020 or later, courtesy of sluggish inflation.

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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