Japan Equity Rally Could Be in Early Innings | ETF Trends

Using the WisdomTree Japan Hedged Equity ETF (DXJ) as the measuring stick, it’s fair to say the Japan stock rally has some longevity.

Over the past three years, that fund is higher by 98.4%. That’s beat the S&P 500 by better than 3-to-1 over that span. Confirming that currency hedging has been a winning bet when it comes to Japan stocks, that three-year period coincided with dollar strength and yen weakness. That underscores why DXJ handily outpaced the 6.6% returned by the MSCI Japan Index.

When any nonleveraged ETF almost doubles over three years as DXJ has, it’s reasonable for investors to ponder whether the easy money has been made and how much more gas is left in the tank. Regarding Japan stocks, some market observers believe the current rally is still in its early innings. That assessment implies potential for longer-ranging upside for DXJ.

Drilling Down on the Japan ETF DXJ Opportunity Set

The fund has seen nearly $1.1 billion in year-to-date inflows. So advisors and investors are expressing enthusiasm for Japan equities. Corporate governance reforms are among the selling points when it comes to Japan stocks, including DXJ holdings.

Corporate governance reforms are at the heart of increased optimism behind Japan. While it isn’t the first time that bulls have used this narrative, efforts this time seem to have more staying power,” noted Adam Sabban of Morningstar. “Companies with sagging stock prices (particularly those with a price/book ratio of less than 1.0) are being cajoled by regulators to act quickly to improve their capital efficiency. Those that do not comply are publicly singled out. Other initiatives include the expansion of English disclosure practices to encourage more foreign investment.”

Governance Often Overlooked

One way of looking at the scenario highlighted above is that while many domestic investors are enthusiastic about ESG standards, the “G” often goes overlooked in the U.S. Conversely, Japan is making substantive moves to improve corporate governance. The results of those efforts are enhancing outcomes for investors.

It’s also worth noting Japan’s broader corporate governance firms have roots in regulators there pushing corporations to bolster shareholder rewards. Those rewards include buybacks and dividends. Japane companies have responded, significantly bolstering the country’s status as a credible dividend growth market.

Rising payouts have been integral in DXJ’s aforementioned upside. Importantly, many of the ETF’s holdings remain attractively valued. And the fund’s 1.12% distribution yield implies ample room for long-term dividend growth.

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