“We have upgraded Japanese equities to overweight, as we believe they should disproportionately benefit from global reflation,” BlackRock strategists said in a note.
The Bank of Japan’s loose monetary policies along with a wider rising rate differentials between the U.S. and Japan could support a depreciating Japanese yen currency over the short-term, which would bolster the export-heavy Japanese market.
The yen has been weakening against the greenback, with the U.S. dollar now trading at around ¥114.4, compared to ¥103 back in November, 2016.
Meanwhile, the depreciating JPY has allowed currency-hedged Japan ETFs to outperform their non-hedged peers. For instance, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) have been go-to options to access Japanese equities markets while hedging against foreign exchange risks. Over the past three months,DXJ rose 14.4%, HEWJ gained 11.6% and DBJP increased 11.6%, whereas the non-hedged iShares MSCI Japan ETF (NYSEArca: EWJ) was only 2.7% higher.
“Beyond the currency effect, we see tentative signs of a pickup in inflation as well as rising corporate buybacks and dividend payouts as further positives. All these are translating into higher earnings estimates,” according to BlackRock.
Japanese equities also show more attractive valuations, compared to the pricier U.S. markers. For instance, HEWJ shows a 15.42 price-to-earnings and a 1.2 price-to-book, whereas the S&P 500 index is trading at a 18.9 P/E and a 2.6 P/B.
Furthermore, as an economy that is closely tied to the global market, the continued growth will help lift Japanese equities.
“Japan is in a prime position to benefit from a cyclical upturn in global growth,” BlackRock added.
For more information on the Japanese markets, visit our Japan category.