Over the past few years, Japan stocks have been among the world’s best performers. That’s particularly the case when excluding the U.S. Last month, the Nikkei 225 hit an all-time high for the first time since 1989.
For its part, the WisdomTree Japan Hedged Equity ETF (DXJ) is higher by 29.51% over the past year and 22.15% YTD. Yet some investors may be concerned that they’ve missed the bulk of the upside to be had with Japanese equities. And some experts see things differently. They believe the rally by Japanese stocks is sustainable.
For example, Hiromi Yamaji, head of the Japan Exchange Group, recently told Bloomberg that efforts to compel more Japanese companies, including DXJ holdings, to engage in shareholder rewards as well as plans to attract more listings from across Asia could be longer-ranging catalysts for Japanese stocks.
Catalysts Abound for DXJ Upside
Given DXJ’s recent bullishness, some market participants might say upside from here looks capped. That could prove inaccurate. Data suggests that for the first time in years, foreign investors are returning to Japanese equities in earnest.
The government is taking steps to drive increased retail participation in local financial markets. Take the case of the Doubling Asset-Based Income Plan (DABIP), which was enacted two years ago.
“When Prime Minister Fumio Kishida’s administration announced the DABIP in 2022, the country had 17 million Nippon Individual Savings Accounts (NISA) in Japan’s defined contribution program,” noted Jeff Weniger, head of equity strategy at WisdomTree. “Think of these as Japan’s equivalent of the 401(k). The goal was to multiply the number of NISA accounts by two, to 34 million, ‘within five years.’ For some historical context, there were about 6 million such accounts in 2015.”
Data confirms the DABIP has been a success. Last month, Japan’s Financial Services Agency said the number of DABIP accounts in Japan at end-Q1 was 23.2 million. That’s a 24% year-over-year increase.
Big-Name Investors Displaying Enthusiasm
Another supportive factor for Japanese stocks and DXJ is that some big-name professional investors in the U.S. are displaying enthusiasm for Japanese stocks. Those equities include some DXJ holdings.
“Private equity is also circling. Joseph Bae, co-CEO of KKR, says Japan’s corporate governance reform is ‘unlocking enormous value within companies,’ according to Nikkei Asia,” added Weniger. “Big name activists such as Elliott Management are also drawing attention to the country as it builds equity stakes in large firms, the most recent of which is Sumitomo, the trading house that also counts Berkshire Hathaway on the shareholder roster.”
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