With the Nikkei Index in Japan soaring to record highs even as the country slips into a recession, there are concerns that Japanese stocks are getting ahead of themselves.
The MSCI Japan Index is higher by 3.78% over the past month. However, some market observers believe Japanese equities are far from euphoria territory. That could signal that opportunity remains with exchange traded funds such as the WisdomTree Japan Hedged Equity ETF (DXJ). DXJ, which hedges dollar/yen fluctuations, is up 7.79% over the past month, bringing its 2024 gain to 17.29%.
In other words, DXJ is beating the S&P 500 by a margin of better than 2-to-1 and that feat has been accomplished in less than two months. Rallies like that may give investors pause and set expectations for pullbacks, but some experts see things differently.
Euphoria May Not Dent Japan ETF DXJ’s Case
There is mounting ebullience aimed at Japanese stocks and ETFs such as DXJ. But the sentiment is warranted and rooted in fundamentals. Plus, funds such as DXJ offer some underappreciated advantages. Additionally, they aren’t yet drawing inflows on par with past eras of elevated hype.
“Joe Montana (NFL) and Magic Johnson (NBA) were the respective league MVPs the last time the Nikkei 225 hit an all-time high, yet here we are today. From our corner, we’re surprised that flows to Japan-focused ETFs – while increasing – are well shy of prior euphoric levels. Notably, Japan does not have major concentration issues, and the region’s Industrial heavy exposure is a nice complement to the Tech heavy U.S,” noted Todd Sohn of Strategas Research Partners.
As for the fundamentals underpinning the Japan rally, those are solid and likely to remain intact for some time. Those include strong balance sheets, increasing shareholder rewards, and an accommodative central bank.
“We believe Japan’s equity rally has room to run – unlike some past false starts. We think both the macro outlook and company-level developments will drive the next leg,” according to BlackRock. “The corporate earnings growth we expected since 2023 is playing out. Yet we don’t see markets fully pricing in positive signs like corporate reforms. We think the Bank of Japan will cautiously wind down its ultra-loose monetary policy to avoid disrupting an exit from decades of no inflation.”
BlackRock is “overweight” Japan stocks. Japanese small-caps are getting into the act, too. DXJ’s small-cap counterpart, the WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), is up nearly 9% year-to-date while the Russell 2000 Index is higher by a scant 0.80%.
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