Ex-US developed markets exchange traded funds are surging this year and Japan ETFs are participating in that trend. For example, the iShares MSCI Japan ETF (NYSEArca: EWJ) is up more than 11% year-to-date and was seen hitting new highs on Tuesday.

There is growing, data-driven optimism about Japan, the world’s third-largest economy behind the U.S. and China, and those robust economic underpinnings could fuel more upside for ETFs like EWJ and the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ).

“The Nikkei Japan Composite PMI Output Index rose from 52.6 in April to 53.4 in May, marking the eighth successive month of expansion and the best performance since January 2014. Notably, the latest reading pushed the second quarter average to 53.0, up from the first quarter’s mean of 52.5, and remained consistent with robust GDP growth,” said Markit in a note.

The iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) are among the other well-known Japan ETFs for investors to consider. Like the aforementioned DXJ, DBJP and HEWJ are currency hedged. EWJ is not currency hedged.

Last year, the yen also depreciated after Prime Minister Shinzo Abe’s ruling coalition acquired a majority in the parliament’s upper house. Japanese equities rallied and the yen weakened on hopes that the more hands-on administration would enact further measures to support the economy.

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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. EWJ is not a currency hedged ETF.

Japan’s “service sector has expanded in tandem with manufacturing, suggesting that the recent run of strong factory activity has partially spurred greater business volumes for services providers. Higher volumes of new work in turn saw the service sector reporting the highest rate of increase in business activity since August 2015 during May,” according to Markit.

Boding well for Japanese stocks and the aforementioned ETFs is the Bank of Japan’s commitment to its stimulus efforts, indicating investors should not be overly concerned with speculation that improving economic data could compel BoJ to taper its easing efforts.

“Solid economic growth and rising prices have fueled speculation that the Bank of Japan (BOJ) could soon signal its intention to start trimming its stimulus. However, such talk still looks premature. BOJ governor Haruhiko Kuroda said recently that now is not the time to announce an exit strategy to its stimulus programme,” notes Markit.

For more information on the Japanese market, visit our Japan category.

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