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Japan's Stocks Soar: New Investing Dawn or Echo of Bubble Era?

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Japan's Nikkei benchmark index has rallied to its highest point since July 1990. Several key factors are fueling this stock rally. A strong earnings season, views that the Bank of Japan will maintain its stimulus longer, and the economy showing signs of a post-COVID consumption rebound all underpin the optimism.

In May, winning Japan ETFs were Xtrackers MSCI Japan Hedged Equity ETF (DBJP - Free Report) , iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report) , Franklin FTSE Japan Hedged ETF (FLJH - Free Report) and WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) . These ETFs have gained in the range of 4.8% to 5.5%.

Factors Behind the Surge

Key factors driving the rally include an impressive earnings season, a weaker yen buttressed by extended stimulus from the Bank of Japan, and signs of post-pandemic consumption revival. Moreover, international investments, notably from Warren Buffett, and enhanced corporate governance have added to this upward momentum. A promising U.S. debt ceiling deal further encouraged the Nikkei's leap to this 33-year peak.

A New Age of Corporate Governance

The stock market's performance is also indicative of sweeping corporate reforms, notably business portfolio restructuring. This is exemplified by Ricoh's prospective collaboration with a Toshiba unit to manufacture copiers and printers, which propelled Ricoh to become the day's biggest percentage gainer. Such deals demonstrate that structural changes are taking root in Japan's corporate landscape.

The Return of Foreign Investors

The resurgence of foreign investors in Japan's stock market, unseen since the beginning of 'Abenomics' in 2013, also hints at a positive turnaround. As the reforms are still in their early stages, Japan's market remains an attractive prospect for global investors.

Cheaper Valuation

Japan ETFs hold cheaper valuation. Even after rallying hard in the past one year, Japan ETFs are available at much cheaper valuation than that of U.S. stocks and ETFs. WisdomTree Japan Hedged SmallCap Equity Fund (DXJS) is up 28.7% past year but still has a P/E of 9.97X. WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) has gained 27.8% past year and has a P/E of just 8.74X against S&P 500’s P/E of 17.86X.

ETFs in Focus

With the greenback likely to gain strength due to higher U.S. rates, buying currency-hedged Japan ETFs would prove more profitable than the regular ones. However, we believe that more rally in in the cards for Japan ETFs.

Bottom Line

Having said that, the market is not without its caution flags. Investors remain watchful, assessing the possibility of the Nikkei rally's continuation. Nonetheless, market strategists believe there is still room for further growth, provided any U.S. economic slowdown will remain mild and so will be the rippling effect on the global markets.


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