Last year, the currency hedged DXJ and DBJP posted an average gain of 41.5% while EWJ, which does hedge USD/JPY fluctuations, was up 26%.

While prices have fallen, earnings expectations have actually increased over the period, so every dollar of earnings from Japan has gotten cheaper. The estimated price-to-earnings ratio is currently 11.7x and 12.9x for the WisdomTree Japan Hedged Equity Index (WTIDJH) and TOPIX, respectively. For perspective, the S&P 500 index is currently trading at 16.0x estimated earnings, over a 36% premium compared to WTIDJH and a 24% premium to the TOPIX,” said WisdomTree Research Director Jeremy Schwartz in a recent note. [Why The Sun Will Still Rise in Japan]

As Schwartz notes, the export-dependent capital goods sector in Japan “is a higher beta sector, and it did decline more than the TOPIX or WisdomTree’s broad-based Japan Hedged Equity Index. This reflects, in my view, yen sensitivity and global growth concerns (i.e., China) more than concerns over Japan’s local economic performance.”

That sector could offer significant upside if the yen falls and investors can play that theme with the new WisdomTree Japan Hedged Capital Goods Fund (NYSEArca: DXJC). DXJC, which debuted last month, is a direct play on a weaker yen and global auto demand as Toyota (NYSE: TM), Honda (NYSE: HM) and Nissan combine for about 22% of the new fund’s weight.

WisdomTree Japan Hedged Equity Fund