Japan ETFs have experienced significant growth in the past year, with the Nikkei 225 Index surging 14.9% this year following a 39.2% gain in 2023. Currency-hedged Japan ETFs have seen even higher returns. The WisdomTree Japan Hedged Equity ETF (DXJ) has advanced 44.7% in the past year and is up 15.3% this year, while the SPDR S&P 500 ETF Trust (SPY) has added 24.5% in the past year and is up 5.1% this year.
There are several reasons why Japan ETFs have been performing well. One factor is Warren Buffett’s interest in Japanese trading firms. Berkshire Hathaway increased its stake in several Japanese companies last year and pledged to continue seeking opportunities in Japan.
Another reason is the shift away from deflation in Japan. Rising inflation and interest rates have fueled the recent stock rally. Japan’s core consumer price inflation increased 3.1% last year, the largest gain since 1982. Higher labor and raw material expenses are expected to lead to increased earnings, along with elevated real estate values and expanded profit margins.
The Bank of Japan has kept interest rates at -0.1% and continued its yield-curve control policy. The bank remains committed to monetary easing in response to economic activity, price developments, and financial conditions.
Although Japan experienced a technical recession in the fourth quarter, with GDP shrinking 0.4% year over year, this could lead to a prolonged period of easy money policy, which would boost Japan’s shares in the near term. The weakening of domestic demand is less concerning for Japan’s export-centric Nikkei index.
Japan’s exports have shown signs of improvement, with shipments of cars and car parts to the US and demand for chip-making equipment from China driving growth. The decline in the Japanese currency has boosted sales and profits for exporters.
Additionally, Japan stands to gain in the semiconductor business, with Taiwan Semiconductor Manufacturing Co (TSMC) expanding its chip production to Japan by 2027. This investment is expected to support TSMC’s global growth strategy and contribute to Japan’s position in the tech revolution.
Despite the recent surge, Japanese stocks remain attractively valued compared to US stocks. Japan ETFs, such as iShares MSCI Japan ETF (EWJ), iShares Currency Hedged MSCI Japan ETF (HEWJ), iShares JPX-Nikkei 400 ETF (JPXN), and WisdomTree Japan Hedged Equity Fund (DXJ), have lower P/E ratios compared to the S&P 500.
China’s economic improvement could also benefit Japan, as China is Japan’s biggest trading partner.
In conclusion, Japan ETFs have been performing well due to factors such as Warren Buffett’s interest in Japanese trading firms, a shift away from deflation, unchanged interest rates, Japan’s technical recession, improved exports, and attractively-valued shares. Investors can keep an eye on Japan ETFs with high momentum, such as ProShares Ultra MSCI Japan (EZJ), DXJ, Franklin FTSE Japan Hedged ETF (FLJH), HEWJ, Matthews Japan Active ETF (JPAN), and Xtrackers MSCI Japan Hedged Equity ETF (DBJP).
