For investors concerned about increasing volatility in the U.S. stock market, Japanese equities offer a compelling alternative. In recent months, Japan's stock market has not only outperformed that of the United States but has also become an increasingly attractive destination for global investors seeking to diversify away from volatility in American equities.

According to data released by Japan Exchange Group (cited in a Bloomberg press release), foreign investors bought a net 384 billion yen ($2.5 billion) of Japanese equities in cash and futures in the last two weeks of October 2025. Resultantly, the Nikkei 225 delivered exceptional performance, posting its best monthly gain since 1990 with a 29% increase in dollar terms year to date, significantly outpacing the S&P 500's 16% gain over the same period. Impressively, a large portion of this rally has been driven by U.S. investors, whose enthusiasm for Japanese equities has reached levels not seen since the Abenomics era.

This present scenario suggests that pivoting to Japan could be a smart and profitable move for investors seeking substantial gains and diversification. While some may consider jumping into high-growth individual Japanese stocks, the sheer complexity of foreign stock picking and currency fluctuations makes Exchange Traded Funds (ETFs) a far more accessible and prudent option.

These funds offer broad, diversified access to leading Japanese companies and the market’s upward momentum, while sidestepping the volatility and selection risk associated with single-stock plays.

Now, before suggesting a handful of Japanese ETFs that you may consider adding to your watchlist, let us delve deeper into why pivoting to Japan’s stock market is crucial at this very moment and whether it has more growth potential in the future.

Japanese Market Valuation: Still Room to Run Amid US Market Volatility?

While the U.S. market is grappling with its own headwinds, including the aftermath of near-shutdowns and persistent volatility, the broader Japanese stock market offers compelling valuation metrics. Importantly, Japan has fostered a policy environment that supports further shareholder-friendly reforms and earnings growth, both of which bode well for future growth.

Despite its recent rally, the Japanese stock market presents an attractive profile compared to other developed markets, such as the United States. From a valuation perspective, the Nikkei is currently trading at an approximate 32% to the S&P 500 (Trailing 12-month Price/Earnings of 19.25x vs 28.41x), which indicates that the Japanese equity market is still relatively inexpensive.

The backdrop for this attractive valuation is a market benefiting from improved corporate governance and a push for greater shareholder returns, including share buybacks and dividend increases. Looking ahead, factors like moderating inflation, improved trade sentiment like the US-Japan deal finalized in September 2025, artificial intelligence-related growth, corporate governance reforms, as well as steady inflow of foreign funds should continue to boost Japan’s equity market in the days ahead.

On the other hand, even as the uncertainty related to the U.S. government shutdown may be over soon with the Senate having passed the funding bill, significant stock market volatility remains high due to fears of an AI bubble and an impending market correction. This further highlights the advantage of diversifying into the less frothy Japanese stock market.

With major financial institutions like Goldman Sachs announcing (cited in a Bloomberg press release) that global investor positions in Japanese equities remain "light compared with the peak of Abenomics," in November 2025, it indicates room for further capital flows into this market.

Japanese ETFs to Watch

Considering the aforementioned discussion, as Japanese companies continue to strengthen shareholder returns through improved governance, buybacks, and higher payouts, the following Japanese ETFs are perfectly positioned to capture these market-wide tailwinds.

iShares MSCI Japan ETF ((EWJ Quick QuoteEWJ - Free Report) )

This fund, with net assets worth $15.92 billion, offers exposure to 180 large and mid-sized companies in Japan. Its top three holdings include Toyota Motors (4.26%), Mitsubishi UFJ Financial Group (3.83%) and Sony Group (3.78%).

EWJ has surged 25.7% year to date. The fund charges 50 basis points (bps) as fees.

WisdomTree Japan Hedged Equity ETF ((DXJ Quick QuoteDXJ - Free Report) )

This fund, with net assets worth $4.64 million, offers exposure to 431 Japanese dividend paying companies. Its top three holdings include Toyota Motors (5.23%), Mitsubishi UFJ Financial Group (4.77%) and Tokio Marine Holdings (2.92%).

DXJ has surged 25.8% year to date. The fund charges 48 bps as fees.

iShares MSCI Japan Value ETF ((EWJV Quick QuoteEWJV - Free Report) )

This fund, with net assets worth $515.75 million, offers exposure to 115 large and mid-cap Japanese stocks with lower valuations based on fundamentals. Its top three holdings include Toyota Motors (8.66%), Mitsubishi UFJ Financial Group (7.77%) and Sumitomo Mitsui Financial Group (4.47%).

EWJV has soared 28.4% year to date. The fund charges 15 bps as fees.