Entering Wednesday, Japanese stocks sported a wide year-to-date advantage over their U.S. counterparts. This high highlighting the fact that in 2025, there are other games in town besides domestic stocks.
What has gone overlooked by some market participants is that with the right Japan ETFs, they could have generated better performance than the S&P 500 for several years now. For example, the WisdomTree Japan Hedged Equity Fund (DXJ ) returned 116.3% for the three years ending Sept. 16 compared to 69.4% for the S&P 500. Year-to-date, that advantage is 500 basis points in favor of the Japan ETF.
On the surface, those data points might imply that Japanese stocks are tired and may be due for a pullback or period of sideways trading. Upon further examination, there are fundamental tailwinds underpinning strength in Japanese equities, indicating DXJ could have more upside ahead.
Economic Strength Supports DXJ Case
Japan’s increasingly vibrant macroeconomic picture could augur well for DXJ heading into the fourth quarter and next year.
“The economy is continuing to show signs of recovery, especially in domestic demand,” notes Naoki Kamiyama, chief investment officer at Amova Asset Management. “April–June 2025 corporate earnings were solid and GDP growth for the quarter exceeded an annualised 1%, showing that the impact of US tariffs has so far been limited. Perhaps the most important driver of the recent rally is expectations that domestic consumption will remain robust for the foreseeable future.”
The point about rising domestic consumption in Japan is highly relevant to investors mulling DXJ. The ETF allocates 19.42% to consumer discretionary stocks making that its second-largest sector exposure. DXJ may offer a surprise, too: positive leverage to the long-awaited Federal Reserve rate cut that arrived on Wednesday.
Currency-hedged ETFs such as DXJ typically benefit from dollar strength. However, a stronger yen doesn’t have to be a drag for Japanese companies, including DXJ member firms. Amova’s Kamiyama sees Japanese corporations as adapting with aplomb to U.S. monetary and trade policy.
“The main focus appears to be shifting from currency effects to corporate Japan maintaining US-bound export volumes,” added the chief investment officer. “With the Fed seemingly poised to ease, Japanese export volumes could be maintained as lower interest rates may support US consumer confidence. Regarding US tariffs, Japanese companies are adapting; for example, some firms are opting to move production to the US.”
As for the Bank of Japan, Kamiyama said it’s unlikely to boost rates prior to its December meeting. For now, yields on Japanese government bonds likely aren’t high enough to stoke rampant buying. This indicates stocks are the preferred asset with which to access Japan.
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