Back to top

Image: Bigstock

Japan ETFs Beating S&P 500: More Growth in the Cards?

Read MoreHide Full Article

Japan ETFs have been firing on all cylinders over the past year. Japan’s Nikkei 225 Index has surged about 14.9% this year after a 39.2% gain in 2023. Currency-hedged Japan ETFs, which neutralize the fluctuations of the Japanese yen, are up even higher.

WisdomTree Japan Hedged Equity ETF (DXJ - Free Report) has advanced about 44.7% in the past year and is up 15.3% this year. SPDR S&P 500 ETF Trust (SPY - Free Report) has added 24.5% in the past year and is up 5.1% this year. Below, we highlight a few reasons why Japan ETFs have been surging.

Buffett’s Interest in Japan

Last year in May, Warren Buffett's Berkshire Hathaway (BRK.B) showed interest in Japanese trading firms, specifically Mitsubishi Corp., Mitsui, Itochu Corp., Marubeni and Sumitomo. He increased his stake in each of these companies to 7.4% and pledged to continue seeking opportunities in Japan. Buffett said that he liked these stocks for their earnings yield and dividend.

Shift Away From Deflation

The recent stock rally was fueled by rising inflation and interest rates. Japan’s core consumer price inflation jumped 3.1% last year to mark the biggest gain since 1982. Rising food costs and a weaker yen, which made imports expensive, led to this spike.

As the shift away from deflation gains momentum, there is growing anticipation of boosted earnings. This increase is expected to come from the passing on of higher labor and raw material expenses to product prices. Additionally, there are expectations of elevated real estate values and expanded profit margins.

Interest Rates and Yield-Curve Control Remain Unchanged

The BOJ kept interest rates at -0.1% and continued to adhere to its yield-curve control policy, which set the upper limit for 10-year Japanese government bond yields at 1%. The BOJ expressed its commitment to continue with monetary easing while vigilantly responding to economic activity, price developments, and financial conditions. The bank emphasized the need for patience in light of the uncertain global economic and financial market conditions.

Japan in Technical Recession: Is Pain Actually a Gain?

Japan’s GDP shrank 0.4% year over year in the fourth quarter, after a revised 3.3% slump in the July-September period. This was weaker than the median estimate for 1.4% growth in a Reuters poll among economists. Weaker domestic demand led to this contraction.

A recession means a prolonged period of easy money policy in Japan. This, in turn, would boost Japan’s shares in the near term. Moreover, Japan’s key equity index, the Nikkei, is export-centric. Hence, a weakening in domestic demand is not that much a cause for concern.

Japan’s Exports Show Signs of Improvement

Japan's exports rose more than expected in January, driven by U.S.-bound shipments of cars and car parts and Chinese demand for chip-making equipment. This eased some concerns about weakness in the broader economy.

Exports rose 11.9% year over year in January 2024, faster than a 9.5% gain expected by economists in a Reuters poll and 9.7% growth the previous month. The decline in the Japanese currency (due to ultra-easy monetary policy) boosted sales and profits for the country’s exporters.

Japan, AI & Semiconductor Business

The government is spending billions to attract semiconductor giants. Chip giant Taiwan Semiconductor Manufacturing Co (TSMC) is set to expand its chip production to Japan, establishing a new plant in Kumamoto prefecture by 2027. This facility will focus on manufacturing 6-nanometer chips, supporting TSMC's global growth strategy.

By 2028, TSMC aims to boost its production capacity outside Taiwan to 300,000 wafers per month, representing more than 20% of its current capacity. With artificial intelligence and chips being the backbone of today’s tech revolution, Japan stands to gain on this front, too.

Attractively-Valued Shares Despite Recent Surge

Despite the recent surge, Japanese stocks remain attractively valued, particularly compared to U.S. stocks. iShares MSCI Japan ETF (EWJ - Free Report) , iShares Currency Hedged MSCI Japan ETF (HEWJ - Free Report) , iShares JPX-Nikkei 400 ETF (JPXN - Free Report) and  WisdomTree Japan Hedged Equity Fund (DXJ - Free Report) have a P/E ratio of12.72X, 12.72X, 12.22X and 8.74X, respectively against the S&P 500’s P/E of about 22X.

Will China’s Gain Boost Japan?

China is Japan's biggest trading partner. In an effort to bolster the struggling property sector and counter its adverse impact on the economy, China has introduced new measures. Although not much improvement has been noticed yet, any improvement in China’s economy should give another leg-up to Japan’s export sector.

ETFs in Focus

Against this backdrop, investors can keep a tab on Japan ETFs that are currently seeing high momentum. These ETFs include ProShares Ultra MSCI Japan (EZJ - Free Report) , DXJ, Franklin FTSE Japan Hedged ETF (FLJH - Free Report) , HEWJ, Matthews Japan Active ETF (JPAN - Free Report) and Xtrackers MSCI Japan Hedged Equity ETF (DBJP - Free Report) . These ETFs have added about 2.9%, 2.6%, 2.2%, 2.2%, 2% and 1.9%, respectively, in the past week (as of Feb 20, 2024).

Published in