Japan’s Nikkei 225 index has surged about 9% this month, after a 28% gain in 2023. Currency-hedged Japan ETFs, which neutralize the fluctuations of the Japanese yen, are up more than 45% over the past year.

A combination of factors contributed to the rally. Last year, Warren Buffett's Berkshire Hathaway (BRK.B Quick QuoteBRK.B - Free Report) increased its stake in Japan's five largest trading houses. Buffett said that he likes these stocks for their earnings yields and dividends.

Global money managers now view Japan as a much more attractive investment destination than China. Chinese individual investors are also piling into Japanese shares.

The government has incentivized companies to improve corporate governance and use their capital efficiently. We have seen significant improvements in dividends and share buybacks, as well as the unwinding of cross-shareholdings in recent years.

Despite the recent surge, Japanese stocks remain attractively valued, particularly compared to US stocks. At the same time, the earnings and economic outlook remain positive.

The government is spending billions to attract semiconductor giants like Taiwan Semiconductor Manufacturing (TSM Quick QuoteTSM - Free Report) as it tries to regain its status as a major semiconductor power amid rising tensions.

The Bank of Japan has retained its ultralow interest rates while most of its peers raised rates aggressively last year, as inflation remains low compared with other developed countries. As a result, the yen has plunged against the dollar.

The decline in the currency boosts sales and profits for Japanese exporters. Furthermore, due to the strength of the dollar, currency-hedged ETFs have significantly outperformed unhedged Japan funds as well as the S&P 500 index.

The WisdomTree Japan Hedged Equity Fund (DXJ Quick QuoteDXJ - Free Report) holds dividend paying exporters. Well-known companies like Toyota Motor (TM Quick QuoteTM - Free Report) and Mitsubishi Financial Group (MUFG Quick QuoteMUFG - Free Report) are its top holdings.

To learn more about DXJ, the Franklin FTSE Japan Hedged ETF (FLJH Quick QuoteFLJH - Free Report) and the JPMorgan BetaBuilders Japan ETF (BBJP Quick QuoteBBJP - Free Report) , please watch the short video above.