Japan stocks and related ETFs proved effective at pricing in and were somewhat responsive to last week’s presidential election results. For its part, the WisdomTree Japan Hedged Equity ETF (DXJ) gained 1.70% for the month ending November 14.
More recently, DXJ and other Japan ETFs experienced profit-taking following Election Day in the U.S. However, it easily outpaced the unhedged MSCI Japan Index. That could be the symptom of a “nervous lull” as Nikko Asset Management puts it. But the money manager believes Japan stocks will regain their bullish ways.
Some of the post-election jitters displayed by investors as it relates to Japan equities are attributable to President-elect Trump overtly championing trade tariffs on the campaign trail. The U.S. is one of the largest markets for Japan exports. And DXJ is heavily allocated to exporters. However, there’s some speculation Trump aims to use tariffs as a bargaining tool. There’s also speculation that the levies are unlikely to be deployed to the fullest extent.
Setup Still Favors Japan Stocks
Investors are right to evaluate the various scenarios that could affect Japan stocks and ETFs such as DXJ as Trump readies to take the oath of office. But a case can be made that what’s good for U.S. equities could also spark gains for Japan equivalents.
“It is worth noting that US equity-positive developments which Trump could pursue, such as tax-related initiatives, may only have a limited impact on Japanese equities,” noted Nikko. “Tax cuts and tax breaks could increase US [consumption. That, in theory,] would also boost demand for goods imported from Japan. However, such tax-related initiatives could be coupled with aggressive tariffs and a drive to encourage consumers to buy US-manufactured products rather than imported [goods. That] would not favour the Japanese export sector.”
The asset manager added that Japan exporters likely priced in a Trump victory. So they are unlikely to be caught flat-footed should tariff talk gain momentum. There are long-running close ties between the U.S. and Japan. So the latter may not be a point of emphasis for the incoming president regarding tariffs. So while it’s possible Japan stocks face near-term headwinds, the medium- and long-term outlooks are more appealing.
Trajectory Expected to Remain Unchanged for Longer Term
“Concerns regarding security, in addition to worries related to US tariffs, may temporarily dampen sentiment. Still, the trajectory of Japanese equities is expected to remain unchanged over the longer term given the current health of corporate Japan,” added Nikko.
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