The iShares MSCI Japan ETF (NYSEArca: EWJ), one of the largest Japan ETFs listed in the U.S., is up nearly 14% year-to-date and resides closes to its 52-week high. However, some market observers aren’t overly enthusiastic about Japanese stocks.

EWJ seeks to track the investment results of the MSCI Japan Index, which consists of stocks traded primarily on the Tokyo Stock Exchange. It may include large- or mid-capitalization companies.

“Japanese equities have been the star performer since September – rising more dramatically than their global peers in a response to a perceived thaw in U.S.-China trade tensions,” said BlackRock in a recent note. “Yet we maintain our underweight on Japanese equities: They are particularly vulnerable to a growth slowdown in China, and we see no sustained letup in the protectionist push.”

Japan itself is recovering from its own economic doldrums with employment rates and wage growth starting to come to life. This is a welcome sign, particularly after the last 30 years have been marked by stagnant growth following an asset bubble burst that spawned the “Lost Decade” of Japan in the early 90s to the early 2000s.

EWJ Has Solid Fundamentals

Japan does show some solid fundamentals. Specifically, the weaker yen, strong corporate fundamentals, bargain valuations and central bank buying are all positives. Furthermore, Japan’s political temperature is relatively stable. Additionally, stocks in the world’s third-largest economy are inexpensive relative to their U.S. counterparts.

“A perceived easing in U.S.-China trade tensions that led to a shift by investors into unloved assets such as value equities, including beaten-down Japanese stocks,” according to BlackRock. “We do not see this rotation having staying power though. In the near term, we see potential for further bouts of market volatility, as fallout from the trade war is reflected in weak economic data.”

Related: There’s at Least One Reason to Like Japan ETFs 

Japan itself is recovering from its own economic doldrums with employment rates and wage growth starting to come to life. This is a welcome sign, particularly after the last 30 years have been marked by stagnant growth following an asset bubble burst that spawned the “Lost Decade” of Japan in the early 90s to the early 2000s.

“Yet the recent rebound in Japanese equities offers a preview of the potential market reaction should the global economy reaccelerate in 2020. Japanese equities’ cheapness could exaggerate any such move. The price-to-earnings ratio of the blue-chip Nikkei 225 Index has fallen to a historical low of 12,” notes BlackRock.

For more information on the Japanese markets, visit our Japan category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.