Land of the rising returns. More advisors discovering Japanese stocks

American advisors are growing a yen for Japanese stocks.

The iShares Currency Hedged MSCI Japan ETF (Ticker: HEWJ) is up a striking 22 percent year-to-date, far outstripping the S&P 500’s still pretty impressive 13 percent return so far in 2024. The iShares MSCI Japan ETF (Ticker: EWJ) is up 8.5 percent year-to-date, clearly showing how the yen’s fall to 156 per dollar is boosting stocks in the export-oriented country.

Oh, and tourism too as Americans are flocking in droves to the land of the rising sun for the first time in ages thanks to the super strong dollar.

And while Berkshire Hathaway founder Warren Buffett got ahead of the crowd (of course) by putting money into five major Japanese trading houses back in 2019, the rest of the investing world is catching on and catching up.

Jim Caron, portfolio solutions group CIO at Morgan Stanley Investment Management, recently told InvestmentNews that Japan is his “strongest, highest conviction overweight.”

“Over the last year, what we've seen is a change in corporate governance, a change in the savings versus investment plans. So instead of just saving money, putting it in the bank or putting it in safe CDs or something like that, a lot of the investment plans are moving into equities,” said Caron. “So all of the more sharing, shareholder friendly rules are coming through.”

He adds that many investors are currently underweight Japan and as they start to move towards neutral Japan, “you're going to start to get a lot more buying, so we want to stay ahead of that.” 

Nick Codola, senior portfolio manager at Orion, invests in Japan through ETFs, right now mostly of the unhedged variety due to the dramatic fall in the value of the yen relative to the dollar.

“Currently, the yen is trading about 2 standard deviations below its average for this century versus the dollar. The Bank of Japan (BOJ) stated they spent $66 billion in currency interventions in May so we think odds of the yen appreciating is higher than continuing to depreciate at this point if the BOJ keeps stepping in,” said Codola.

David Demming, founder and president of Demming Financial Services, says he have been investing in Japan for years, but has upped his stakes recently in First Eagle and Matthews Funds.

“They have well run companies that were previously poor on corporate governance,” said Demming. “Recently, however, they have had much broader adoption of shareholder commitment and governance. The valuations are higher now, but are still justifiable for the quality of companies and earnings.”

Steve Stanganelli, financial advisor at Clear Wealth Advisors, says he is a firm believer in building globally diversified portfolios. Like Codola, he also gets his international exposure through low-cost international ETFs like ex-US Vanguard FTSE Developed Markets Index Fund (Ticker: VEA) which owns Japanese stocks like Toyota. 

Stanganelli has been overweight US stocks in recent years and that has paid off for him due to US outperformance. He points out that the value of international equities as a hedge “has dropped as more non-US markets are linked and move together.”

Still, the skeptics remain, or at least prefer to keep their chips in the US.

Will Sterling, partner at TritonPoint Wealth, for example, acknowledges that Japanese equities have been a good trade. However, he points out that they are still underperforming the S&P 500 in 2024 and over the past 12 months when factoring in the weakening yen. 

“The reforms in Japan have been additive and I'd suggest that South Korea will follow the same roadmap, but still does not warrant a change in our secular view,” said Sterling.