Investors wanting the benefits of international equity diversification without the specter of disappointment haven’t had many to choose from recent. But Japan has stood tall, and that could again be the case in 2025.
Helped by yen weakness, the WisdomTree Japan Hedged Equity ETF (DXJ ) has been one of the top-performing developed market single-country currency-hedged ETFs in recent years. In fact, it surged last year even after the Bank of Japan (BOJ) surprised global investors with a hawkish stance. There’s belief that BOJ could modestly hike rates again this year. But some experts believe Japan equities are supported by compelling fundamentals that make the asset class a consideration beyond monetary policy.
“We continue to favour Japanese equities due to ongoing indications of Japan’s structural reflation and relative undervaluation,” observed Nikko Asset Management. “The competitive risk premium Japanese equities now offer is also appealing. Within this context, we continue to look for value among Japanese domestic demand-related [stocks. These] may be more resilient in the face of any correction in US markets.”
Japan GDP Growth Could Lift DXJ
Nikko pointed out that Japan could post above trend GDP growth this year. And that’s pertinent to investors considering DXJ. That’s because the ETF has a cyclical tilt with the industrial, consumer discretionary and financial services sectors. Those combine for about 61% of the fund’s roster.
Should Japan meet or beat GDP forecasts, that could be a catalyst for DXJ as 2025 moves along. That’s because Japan and the ETF are often viewed as export stories. But domestic consumption is a meaningful contributor GDP there.
Japan's 'Virtuous Circle'
“Nevertheless, it is significant that Japanese household consumption continues to strengthen, even at a slow pace. Compared to net exports’ negligible share of GDP, household consumption accounts for over 50%,” added Nikko Asset Management. “This means that the longer Japan maintains its ‘virtuous circle’ of positive wages and prices, the more likely it is to establish domestic demand as a buffer to any downturn in external demand.”
Regarding interest rate increases, BOJ will likely tread lightly on that front. If that proves to be case, DXJ could prove resilient against the backdrop of tighter monetary policy in Japan.
“[We expect the pace of the BOJ’s tightening to remain gradual. But our] central scenario is for it to hike an additional 25 bps in the latter half of 2025, taking the policy rate to 75 bps,” concluded Nikko.
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