Although Japan, the world’s third-largest economy, recently entered its second recession in two years, the weak yen and some of the lowest valuations in the developed world could compel money managers to boost allocations to Japan ETFs.
Since 1974, the long-term price-to-book ratio between Japanese and U.S. stocks is around 1.2, but even with a dip below 0.75 since 1991, Japanese stocks are currently deeply discounted compared to U.S. counterparts, according to BlackRock data published earlier this month. [Value in Japan ETFs]
If fund managers decided to remove their underweight positions on Japanese stocks, the already rapidly growing DXJ, DBJP and others could easily grow some more.
“If the managers we tracked removed their under-weight position, this would imply additional inflow of approximately $31 billion to Japanese equities. To put this in perspective, this is approximately one-third the total assets in the ETF foreign large-cap category within the U.S.,” according to Schwartz.
WisdomTree Japan Hedged Equity Fund