Japanese stocks faced mid-summer volatility caused by a sudden turn to hawkish monetary policy by the Bank of Japan (BOJ). However, they’re poised for another solid annual performance with the unhedged MSCI Japan Index higher by more than 11% year-to-date.
That means the benchmark gauge of Japanese equities will close higher for the fifth time in the past seven years. However, that doesn’t imply Japanese stocks will disappoint in 2025, even with the BOJ expected to continue its rate-tightening regime. Some experts believe Japanese stocks will generate more upside next year.
That could be beneficial to an array of exchange traded funds, even currency hedged fare such as the WisdomTree Japan Hedged Equity ETF (DXJ). Despite the aforementioned rate hikes, DXJ is beating the MSCI Japan Index by a better-than-2-to-1 margin this year. In fact, the WisdomTree ETF is sporting a modest advantage over the S&P 500.
Japanese Stocks Could Have 2025 Tailwinds
In a new report, Nikko Asset Management chief global strategist Naomi Fink noted that the “virtuous cycle” that has propelled Japanese stocks over the past several years could continue in 2025. Should that thesis prove accurate, it could be to the benefit of ETFs such as DXJ.
“As long as the US equity rally continues, we believe that a combination of cyclical factors—including the carry trade, the yen’s weakness and risk tolerance—is likely to continue buoying Japanese stocks. Furthermore, we see Japan’s relative fundamentals remaining attractive even when the US growth cycle eventually slows,” according to Fink.
That virtuous cycle — one that has made DXJ one of the stars of the Japan large-cap ETF lot — has been fostered in part by Japanese regulators pushing companies there to increase shareholder rewards. Elevated share buybacks have been catalysts for Japanese equities, luring more global investors to the market. Plus, a new wave of dividends have enticed local investors. Low yields and ample cash reserves are expected to support continued payout growth.
Overall, a case can be made that yen strength isn’t the alarm bell it used to be. Japanese stocks could again be one of the best developed market ideas outside of the U.S. next year.
“We expect Japan to offer good diversification and downside protection primarily because of its solid structural reflation credentials,” added Fink. “These include labour supply shortages (which are driving real wage gains as well as investment in software), as well as steady improvements in corporate governance, profit margins and return on equity. These factors are gradually penetrating the domestic side of Japan’s economy.”
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