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Japan GDP May Slump Amid Other Troubles: 2 Funds to Sell - Best of Funds

The sales tax hike that Japan implemented in April might have played an adverse role. Economists predict that the sales tax hike will affect demand while capital expenditure and consumption are braced for a sharp decline. Ahead of the nation's GDP report on Wednesday, economists are forecasting a sharp contraction in second quarter GDP.

Incidentally, when Japan had hiked sales tax from 3% to 5% in 1997, the economy had sunk into recession soon afterwards.

The GDP report (to be published Wednesday morning Japan time) comes close on the heels of other dismal data the nation has been exposed to of late. According to data released last month, the country's rate of inflation declined in June compared to that in May. The country has posted trade deficits every month for two successive years now. Real wages dropped 3.8% year on year in May, the sharpest fall in years. Japan has also reduced its growth target for the year from 1.1% to 1% last month.

Amid such troubles, investors may not want to hold on to Japan mutual funds. We will help investors locate 2 low-ranked funds that should be dropped from portfolios. However, before doing so, let's dig deeper into the subject.

Sales Tax Hike; GDP to Decline

The Wall Street Journal said that economists predict a 7.1% fall in gross domestic product on an annualized basis for the second quarter. Separately, a Reuters poll also forecasts a 7.1% contraction for Asia's second-largest economy. This contrasts unfavorably with the 6.7% gain that Japan registered in the first quarter.

The focus is on the sales tax hike, as economists are waiting to see if the slowdown sparked by the hike is just a roadblock now or a long-term huddle for Abenomics. Prime Minister Shinzo Abe has been bringing in economic policies to restore Japan's healthy economic growth. The first quarter GDP gain was also due to consumers buying big-ticket products before they bore the brunt of paying higher sales taxes. Simply, consumers spent a lot more in the first quarter to beat the price hike.

In April, Japan raised its consumption tax from 5% to 8%, the first such increase in 17 years. The Bank of Japan estimates that this hike contributed 2 percentage points to May's core inflation.

However, post hike, household spending and corporate investment have declined. Industrial production had its sharpest rate of decline in May since the natural disasters in Mar 2011. Industrial production slumped 3.3% in May. Manufacturers are also trying to bring down the inventories.

Income Growth Falls Short of Inflation; Exports Dip

Excluding fresh food, consumer prices increased 3.3% year over year in June. This lagged the 3.4% increase in May and underlines the difficulties the Bank of Japan (BOJ) faces as it attempts to meet its inflation target of 2%.

While the pace of inflation declines, a recovery in consumption also remains elusive. This is because growth in income is failing to keep up with inflation. Average overall monthly earnings increased 0.4% in June on a yearly basis, compared to a 0.6% increase in May.

The decline in wage growth is also reflected in retail sales numbers for June. Retail sales declined 0.6% year over year and fell 7% in the second quarter. This is again probably an outcome of the sales tax hike. Analysts believe that retail sales may fall below year-ago levels in the July-September quarter.

Exports contracted by 2% in June, while imports increased by 8.4%. The increase in imports was primarily attributable to an increase in fossil fuel purchases, following the closure of Japan's nuclear plants. Exports also declined 1.7% by volume and were 23% lower in value terms than the high achieved in March 2008. This is in contrast to a 25% growth in U.S. exports over the same period.

2 Japanese Funds to Sell Now

We will pick 2 Japan-Equity funds that carry a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell) as we expect the funds to underperform its peers in the future.

Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

These funds also have a negative return year to date.

ProFunds UltraJapan Service (UJPSX) seeks investment results equal to two times of the Nikkei 225 Stock Average's daily return. The fund invests in derivatives with return potential of two times of the index. The fund provides leveraged exposure to the large-cap, Japan-based Nikkei 225 Stock Average.

The fund currently carries a Zacks Mutual Fund Rank #5 (Strong Sell). The fund has lost 21.1% year to date.

ProFunds UltraJapan Fund Investor Class (UJPIX) also carries a Zacks Mutual Fund Rank #5 (Strong Sell) and has lost 20.6% year to date.

Rydex Japan 2x Strategy Fund Class A (RYJSX) seeks to give returns that correspond to two times the performance of the fair value of the Nikkei 225 Stock Average. The fund invests in common stocks having market capital within the range of those listed in the index. The fund invests a lion's share of its assets in securities that have the potential to return two times the performance of the underlying index.

The fund currently carries a Zacks Mutual Fund Rank #4 (Strong Sell) . The fund has lost 12.3% year to date.

To view the Zacks Rank and past performance of all Japan mutual funds, investors can click here to see the complete list of funds .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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