Since WisdomTree’s inception in 2006, Japan has been one of our areas of focus. Two of our original 20 fund launches were Japan exchange-traded funds (ETFs), and we were the first company to offer currency hedging in Japan in an ETF wrapper. Japan continues to be an area we’re passionate about—particularly as it pertains to currency hedging—and we are often asked about our thoughts on the markets there. Despite having slightly negative performance in the first half of 2018, Japan remains one of our favored regions for many reasons.
Valuations are the most attractive of any developed market, with our WisdomTree Japan Hedged Equity Index trading at just 11.4x earnings. Profitability has markedly improved in recent years, with the Tokyo Stock Price Index at an all-time high in earnings and a post-crisis high in return on equity. The Bank of Japan indicated in its July meeting that it remains committed to strong monetary stimulus through both low-interest rates and its yield curve control program. Corporate reform advancements have shown up in metrics such as record lows in cross-shareholdings1 and a fourfold increase in companies with multiple independent directors.2 This is all on top of a widening interest rate differential between the U.S. and Japan, providing investors in hedged Japanese equities a tailwind of over 2% annually (and rising).
With so many reasons to be bullish, the question almost always comes up: How should I allocate to Japan?
Digging into 2018 Performance
A recent addition to WisdomTree’s website is our Index Performance Attribution tool. While offering common attribution classifications such as basic sector and market cap breakdowns, it also analyzes different fundamental groupings, such as return on equity and volatility quintiles. In the case of our WisdomTree Japan Hedged Equity Index (which includes only export-focused companies), we also include a geographic revenue filter.
