Here's What's Creating Momentum For Japan ETFs

The iShares MSCI Japan ETF (NYSEArca: EWJ) is one of the largest exchange traded funds tracking Japanese stocks and EWJ, along with other Japan ETFs, is enjoying the renaissance being experienced by ex-US developed markets stocks. EWJ is higher by 11% year-to-date and there could be more gains on the way for Japanese stocks.

EWJ has delivered a solid performance even in the face of the U.S. dollar slumping and the yen being solid. Japanese stocks are usually adversely affected by a stronger yen due to the economy’s high dependence on exports. Importantly, Japanese stocks are attractively valued relative to other developed markets.

“We looked at how Japanese equity performance and valuation have trended since 1990. Japanese equities are approaching peaks they have struggled to climb over in past decades, but we think this time may be different,” said BlackRock in a recent note. “Valuation is lower today than at previous high points in stock market performance, as the chart shows. Moreover, Japanese stocks appear inexpensive on the global stage. They are trading at a 20% discount to U.S. peers on a 12-month forward price-to-earnings basis, for example.”

Japanese equities also show more attractive valuations, compared to the pricier U.S. markers. For instance, EWJ shows a 15.42 price-to-earnings and a 1.2 price-to-book, whereas the S&P 500 index is trading at a 18.9 P/E and a 2.6 P/B.

“The Bank of Japan’s (BoJ’s) equity purchases and domestic investors’ increasing preference for stocks provide further support. Our analysis shows Japanese equities remain far from a crowded trade as foreign investor flows into Japan have recently subsided,” according to BlackRock.