Franklin FTSE Japan Hedged ETF

FLJH

Market cap $101M

Solid growth and ongoing shareholder-friendly reforms are driving Japanese equity gains, keeping us overweight. We see the AI theme playing out globally.

Berkshire's higher stakes in Mitsubishi and Mitsui spark a rally in Japan's trading houses. ETFs like FJP, EWJV, DFJ, SCJ, FLJH are likely to benefit.

The Franklin FTSE Japan Hedged ETF, which covers around 500 Japanese stocks and aims to mitigate Yen currency risk, has underperformed developed markets this year. We see how FLJH stacks up against the largest currency hedged Japanese themed ETF- DXJ. We examine if current conditions are supportive for a long position in FLJH.

As the global private equity industry took tentative steps toward recovery in 2024, Japan raced ahead. The value of private equity investment in Japan jumped nearly 41% over the prior-year total in 2024, far outpacing the 25% year-over-year gain in global private equity deal value, according to S&P Global Market Intelligence data.

Today's data were a mixed bag, but the Bank of Japan will pay more attention to the sharp rise in Tokyo's inflation. Tokyo consumer prices rose more than expected to 2.6% YoY (vs 2.2% in July, 2.3% market consensus).

The “real” policy rate is massively negative, with the new policy rate of 0.25% far below Core CPI of 2.6%. When QT reaches about ¥3 trillion per month in 2026, it would represent a reduction of its JGB holdings of about 0.5% per month.

Japan has been struggling for some time to generate enough velocity in inflation to escape the gravitational pull of deflation. The story for the rest of 2024 and into 2025 is now centered on whether inflation will be sustained at the BOJ's 2% target.

In March, the Bank of Japan abolished its 8-year-old negative interest rate policy, hiking rates for the first time in 17 years by raising its benchmark rate to 0-0.1%. To combat inflation while also avoiding an excessive surge in interest payments, the BOJ is considering passive quantitative tightening.

We'd rather downplay the weaker-than-expected manufacturing data and focus on a solid recovery in retail sales and a reacceleration in inflation, which will be welcomed by the Bank of Japan. Inflation has been quite choppy due to various government programmes and utility prices.

By end-April 2024, Japanese equities had outperformed the FTSE All-World index over 12 months and in the year to date. Japan has undertaken significant structural corporate reforms in recent years.