As measured by the MSCI Japan Index, Japan equities closed 2024 with a whimper. That gauge lost 3.72% over the final month of the year, closing 2024 with a gain of just 4.61%.
That’s likely the result of that index not hedging yen/dollar fluctuations because the strategies that do that flourished last year. For example, the WisdomTree Japan Hedged Equity ETF (DXJ) gained more than 25% in 2024. It outpaced the S&P 500 by more than 200 basis points. It could be a fund to watch this year. That’s because some experts believe Japan stocks will shake off their recent weakness and retest prior records.
Should that thesis become validated, it would signal that global investors are comfortable with the potential for political volatility in the Land of the Rising Sun. It would also signal that they don’t expect President-elect Trump to pursue punitive trade tariffs against Japan exporters.
DXJ Could Shine in 2025
As DXJ proves, when accounting for yen weakness, last year was a solid one for Japan stocks. It’s possible things get even better this year.
“The benchmark Nikkei Stock Average could advance toward 45,000, experts said, surpassing the all-time high of 42,224.02 reached in July after exceeding in February the previous record set during Japan’s asset bubble era in 1989. The index ended 2024 with an annual gain of 19 percent at 39,894.54,” reported Donican Lan for Kyodo News.
Currency market participants don’t expect much in the way of yen volatility this year. The prevailing wisdom indicates Japan’s currency should be steady in a range of 140 to 160 against the greenback. Lack of downside forecasts for the yen doesn’t necessarily dent the case for DXJ. That’s because market observers are bullish on Japan’s economy. And that’s a theme to which the WisdomTree ETF is highly levered.
Economic Recovery Expected
“While the dollar-yen rate is likely to have a limited impact on equities next year, an economic recovery at home is expected to make stocks attractive for investors, with Japan appearing finally to be on a path to realizing wage growth that outpaces inflation, analysts said,” according to Kyodo News.
As the publication notes, Japan corporations delivered pay raises in 2024 that were well in excess of inflation. That’s a positive for DXJ investors to ponder because the ETF allocates 20.41% of its weight to consumer cyclical stocks. That’s its second-largest sector exposure behind only industrials.
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