Japanese Stocks Can Extend Leadership
News Summary
As of September 16, 2025, Japanese stocks have significantly outperformed their U.S. counterparts over the past three years. For instance, the WisdomTree Japan Hedged Equity Fund (DXJ) returned 116.3% compared to 69.4% for the S&P 500, with DXJ also leading by 500 basis points year-to-date. While these figures might suggest Japanese stocks are due for a pullback, the article highlights strong fundamental tailwinds that could support further upside for DXJ. Japan's macroeconomic picture is increasingly vibrant, with domestic demand continuing to recover. Corporate earnings for April-June 2025 were solid, and GDP growth exceeded an annualized 1%, indicating limited impact from the Trump administration's U.S. tariffs. Robust domestic consumption expectations are a key driver of the recent rally, with DXJ allocating 19.42% to consumer discretionary stocks. Furthermore, while currency-hedged ETFs typically benefit from dollar strength, Japanese companies are adeptly adapting to U.S. monetary and trade policies, including moving some production to the U.S. to maintain export volumes. A Federal Reserve rate cut could support U.S. consumer confidence, indirectly benefiting Japanese exports. The Bank of Japan is not expected to raise rates before its December meeting, making stocks a more attractive asset than Japanese government bonds.
Background
In 2025, global investors are closely monitoring the impact of major economies' monetary policies and trade relations on market performance. In the U.S., the Trump administration's protectionist trade policies, such as tariffs, continue to influence global supply chains and multinational corporate strategies. Concurrently, the Federal Reserve's monetary policy trajectory, particularly expectations of rate cuts, is crucial for global capital market liquidity and corporate earnings outlooks. In Japan, the government and corporations are striving to overcome deflation and revitalize the economy through structural reforms and domestic demand stimulation. The Bank of Japan has long maintained an ultra-loose monetary policy, leading to low Japanese government bond yields and making the equity market more attractive for asset allocation. Against this backdrop, the sustained strong performance of Japanese stocks, especially driven by currency-hedged ETF products, has become an important avenue for investors seeking diversification and alpha.
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