Will Japan’s Strong Performance Continue?

After Japan’s strong performance this year, some believe the market will soon run out of steam. Heidi Richardson disagrees.

In late June, Japan’s benchmark Nikkei 225 index closed at its highest level since March 2000. While Japanese stocks are down a bit from then, the Japanese market, as measured by the MSCI Japan index, is still up roughly 15 percent this year, outperforming the broader MSCI ACWI index global market, according to mid-July Bloomberg data.

Japan’s strong performance has prompted some market watchers to question whether there’s still a case for adding exposure to the Land of the Rising Sun. They’re worried that the market will soon lose steam, as one of the major recent buyers of Japanese stocks—the Government Pension Investment Fund (or GPIF)—is set to hit its target equity allocation as soon as this month.

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Market Realist – Japan’s strong performance is likely to continue.

Japanese stocks (DXJ) have been among the best performers this year. The iShares MSCI Japan ETF (EWJ) has returned 14.0% YTD (year-to-date). Meanwhile, its currency-hedged sibling has risen by 17.6%. This is quite impressive, given that the S&P 500 (SPY) (IVV) has been flat for the year, while the iShares MSCI ACWI ETF (ACWI)—which tracks stocks from around the globe—has given returns of 2.4% YTD.

However, Japanese stocks are nowhere close to the levels seen in the late 1980s. The Nikkei 225 Index peaked at ~40,000 in 1989, but since then it has been a painful ride for the Japanese. The index is close to half of that level today, after two decades of deflation.

However, current Prime Minister Shinzo Abe has brought about monetary easing to depreciate the yen—a process well underway—and to fight deflation. Monetary easing is one of the three arrows of Abenomics.