Nikkei Beats Lebron to 40K, but Will Japan ETFs Continue to Soar?

Contemporary basketball legend LeBron James likely did not know that just 36 hours before he became the first NBA player to hit 40,000 career points, Japan’s Nikkei stock index hit the same all-time high.  

While LeBron has spent the last couple of decades impressing fans, the same cannot be said of the Japanese stock market. The Nikkei needed 35 years of struggle to achieve its latest highs. 

In the 1980s, Japan was the envy of the global stock market and economy until its economy lost steam, topping out in December of 1989 with the Nikkei average around 39,000. That was around the time little Lebron James was celebrating his fifth birthday. Since that time, LeBron has gained international stardom, while Japan’s burdensome, aging population and lack of US-style innovation has caused it to fall from the planet’s biggest stock market to the butt of many Wall Street jokes.  

It also serves as a reminder to U.S. investors that economies and equity markets can change dramatically. Just as it was difficult to predict that Japan would spend nearly two generations climbing back to where the Nikkei stood during the early days of the George H.W. Bush administration, the emergence of similar debt and demographic issues in the U.S. offer at least a cautionary tale. 

Japan ETFs: Still Some Upside  

As for ETFs that track the Japanese market, many peaked in early 2018 and again in late 2021. So, it is not as if they haven’t appreciated in price since last century. But with the headline Nikkei average jumping to new heights (as LeBron does frequently when grabbing a rebound), the fact that many ETFs that track that market remain under their own high-water marks might imply that some upside remains.  

For instance, the largest Japan offering, the $16.5 billion iShares MSCI Japan ETF (EWJ), sits about 7% below its all-time high as of last Friday’s close. And the iShares JPX-Nikkei 400 ETF (JPXN), which tracks the Nikkei average but only started trading in 2001, is about 8% off its high.  

As evidence of just how hard it has been to get any edge via application of factor-based ETF strategies, the iShares MSCI Japan Small Cap ETF (SCJ) and the First Trust Japan Alpha DEX ETF (FJP) are each about 16% below their peak levels.  

Still, Japan has some hop in its step these days. As in the NBA, even teams that are way behind often rally to win. Pro basketball players are frequently quoted after games as saying things like, “we knew they’d make a run,” and that’s what Japan’s stock market is doing. This has been aided by changes in interest rate policy and other economic agenda items that, at least for now, have met with approval by global equity investors. 

A recession in Japan helped spawn the 2000 dot-com bubble decline, which lasted three years. And this would not be the first time in market history that new records grab headlines, then quickly become market turning points. So, while LeBron James has cemented his legacy as perhaps the greatest ever in his sport, the group of ETFs targeting the Japanese ETF market remains a work in progress.