International equities had a strong 2025, largely anchored on a focus on valuations. Now, as the opportunity broadens out and finds fundamental support, appetite for exposure to international equities among U.S. investors is quickly growing.
While there are many highlights in this category, few are shining brighter than Japan.
My colleague Kirsten Chang explored this week what’s driving emerging market equities and the outlook for the year. As she put it, there’s a lot to like in this slice of the international equity opportunity.
“The case for emerging markets in 2026 rests on more than simple long-term mean reversion,” she said. “Faster growth, cheaper valuations and meaningful exposure to global AI supply chains has put EMs back at the forefront of the global equity conversation.”
Investors have taken notice. The iShares Core MSCI Emerging Markets ETF (IEMG) is among top three asset gatherers this year, taking in some $5 billion in fresh net assets in the first two weeks of January. The iShares MSCI Emerging Markets ETF (EEM) has attracted $1.4 billion. The Avantis Emerging Markets Equity ETF (AVEM) has $580 million in net inflows. The list goes on.
On a similar vein, consider the case for Japan, where a confluence of factors are lining up to deliver what many asset managers expect to be strong results going forward.
Japan in Spotlight
Among international equities, the investment case for Japan is being singled out not only as short-term tactical opportunity but a longer-term growth story.
Under Prime Minister Sanae Takaichi’s pro-growth leadership, Japanese equities have been benefiting from supportive fiscal policy, a path to a normalization of rates, and corporate governance reforms that are expected to lead to growth.
The Nikkei 225 benchmark hit a record high last December. Japanese stocks have continued to build on that momentum. Outlooks are constructive for the country.
Consider Man Group, which framed the opportunity in a note last week this way:
“Heading into 2026 we are moving beyond the simple ‘weak yen’ trade and into a phase where Japanese equities are increasingly shielded from the unpredictable impact of US policy. With what we believe to be a stable, pro-growth leadership and a corporate governance overhaul that has become a survival imperative for companies, for us, Japan is no longer just a tactical hedge, but a strong domestic play with the potential to continue attracting flows back to the region.”
Early-year asset flows suggest investors are embracing this investment case. One of the most popular Japan equities ETFs — and the poster child for currency hedging — the WisdomTree Japan Hedged Equity Fund (DXJ), has taken in some $480 million in net new assets so far in 2026. That compares to only $162 million in net inflows in all of 2025, and represents a continuation of late-year momentum as pro-growth policies take hold.
Performance has been notable, too. Year-to-date, DXJ is up more than 5%, extending what’s now 39% in gains in the past 12 months.
DXJ, which tilts towards exporters and dividend payers, has been outpacing the results of non-hedged ETFs like the iShares MSCI Japan ETF (EWJ). EWJ is up 2.8% so far this year. But EWJ, too, has been finding new traction after ending 2025 with net redemptions. The fund has now picked up nearly $500 million in net new assets this calendar year.
There’s no right or wrong way to access international equities, or, in this case, Japan. However, it’s important to understand the trade offs. Currency hedging can be a tailwind or a headwind to overall results, as WisdomTree’s research analyst Hyun Kang notes. Hedging can mitigate currency volatility, but results vary depending on currency moves.
Offering food for thought in a recent commentary, Kang said, “Investing in foreign companies always comes with foreign currency risk … Hedging the currency exposure—for example, selling the yen short in a forward currency contract—can neutralize the yen exposure within an equity allocation.”
“In a year when the yen appreciates, currency hedging would typically be a headwind relative to unhedged exposures, as you don’t get the benefit of the yen strengthening,” he said. “But 2025 is a unique example and really highlights a case for investors who don’t have a strong view on the yen. In a year when the yen is basically flat to slightly up, our currency-hedged Japan dividend Index has outperformed its unhedged counterpart by more than 400 basis points.”
Japan Leading Broad Access Too
More broadly, investors who have been embracing broad-based passive international equity exposure are also betting on Japan’s growth story. Japan looms large in global portfolios.
The iShares Core MSCI EAFE ETF (IEFA), one of 2026’s most popular ETFs with net inflows nearing $1.5 billion in the first two weeks of the year, has Japan as its largest country exposure. Japan represents 24% of the total portfolio.
Similarly, the Vanguard Total International Stock ETF (VXUS), which owns more than 8,600 securities across all global markets ex- U.S., holds Japan as its lead country allocation at 15% of the portfolio. VXUS has attracted $1.3 billion in net assets this year.
Conclusion
From supportive fiscal policy to corporate governance reform to moderating inflation and expectations for earnings growth, there’s a loud call across market outlooks for a closer look at Japan. Early-days market action and ETF flows suggest many are heeding that call.
We’ll be following closely this year. For a list of Japan equity ETFs, check out ETF Database.
For more news, information, and strategy, visit ETF Trends.
