Amid increasing chatter that international developed market equities will finally outperform their U.S. counterparts this year, it’s not surprising that some investors are mulling exposure to Japanese stocks. Year-to-date, that thesis is being validated, as the MSCI Japan Index is higher by 6.51%. Solid, to be sure, but investors could be doing better by hedging currency risk. Take the case of the Xtrackers MSCI Japan Hedged Equity ETF (DBJP A+). DBJP, which follows the MSCI Japan US Dollar Hedged Index, is up 8.30% since the start of the year.
Obviously, it remains to be seen how the rest of 2023 plays out, but some analysts are constructive on Japanese stocks for this year.
“We reiterate our Favorable View on Japan equity ETFs. Masashi Akutsu expects 9-10% returns this year with a 2,150 target on the TOPIX and a 30,000 target on the Nikkei,” noted Bank of America in a recent note. “Japan looks like a tactical opportunity for US investors after choppy trading in 1Q.”
Strong return on equity (ROE) and the possibility of rising inflation — Japan has long been hindered by persistent deflation — are among the factors Bank of America cites in its assessment of Japanese stocks.
“High wage inflation and stronger consumption are incrementally positive after a period deflation. Our strategists think that capex could surge if inflation becomes entrenched and could bolster ROE. Total shareholder payouts could also approach a record high ¥25tn in 2023,” according to the bank.
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While DBJP is surging to start 2023, there may be more to come because despite the strength in Japanese stocks, the group is under-owned by global money managers. Specific to DBJP, the ETF is the top-rated Japan fund among the six ETFs in this category that Bank of America evaluates. DBJP is one of just two garnering the bank’s top rating of 1-FV.
Further supporting the outlook for DBJP are Japan’s efforts to shore up energy security and bolster its national defense — the latter of which is a key point at a time when China appears intent on saber-rattling in the Asia-Pacific region.
“Japan has recently set a target to increase nuclear power from less than 7% of its energy supply today to 20-22% by the end of the decade. Increased nuclear generation should make energy supplies more secure. Similarly, the government unveiled a five-year plan to double military spending from 1% to 2% of GDP, making it the world’s third largest military spender behind the US and China, according to Reuters,” concluded BofA.
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