Why Japan ETFs Are Rising While Asia Lags

Forget that Prince ditty about 1999: Japan is partying like its 1989. The final year of the ’80s ended a historic run for Japan’s Nikkei 400 stock index, which zoomed from less than 7,000 to nearly 39,000 across seven years. That’s a gain of more than 450%. As they say in Japan, “Wow.”

The last time the Invesco QQQ ETF (QQQ) did that was … never. The highest seven-year run in the history of QQQ was 380%. The difference in percentages gives us an idea of just how “bubbly” the Nikkei became.

Back in ’89, Japan was the envy of the financial world. As its wealth surged, the Nikkei became the largest stock market on the planet; it peaked at 44% of the MSCI World Index during the late 1980s. The U.S. is currently about 65% of that index, while Japan sits at less than 6% of that market capitalization-weighted gauge.

It's natural many of today’s investors (especially those 40 and under) can’t recall when Japanese companies reigned as the wonder of the business worldand Japanese banks the most desired customers on Wall Street. I started my career in 1986 at one of those banks and it was truly the heyday for what the market called “Japan Inc.” 

Japan's Underperforming Stock Market

But since then, Japan has weathered an aging population. Meanwhile, yield curve control measures that suppressed interest rates did not boost economic growth, and a bottom-line market performance has leveled out the Nikkei to around 36,000. But there’s a glass half full and half empty way to look at that. 

U.S. ETF investors typically think of the $14.4 billion iShares MSCI Japan ETF (EWJ) when they think of investing in Japan. That ETF has historically tracked the Nikkei very closely, but a much smaller fund, the $81 million iShares JPX-Nikkei 400 ETF (JPXN) seeks to mimic it exactly.

But as Japan’s stock market continues its long march toward all-time highs set during the George H.W. Bush administration, a strange thing has happened recently: It’s rising apart from happenings in Asia and in the U.S. markets. Since Dec. 20, JPXN has rallied 7%, while both QQQ and the $2.4 billion iShares MSCI All Country Asia Ex-Japan ETF (AAXJ) have risen slightly. It is only a four-week period, but Japan appears to have some pace behind it and stands on the verge of breaking out in a way not seen in a long time, relative to the rest of the developed world’s stock markets.

Japan’s Rally 

Though pinning down specific reasons for Japan’s recent rally is difficult, some point to strength in financial and shipping company performance, as well as optimism over government reform. Chartists can also point to positive developments in the technical picture. 

This marks a stark contrast to the better part of the past decade, when investing in “Asia” meant a close look at nearly everything except Japan. Southeast Asia—with its developing markets in South Korea, Singapore and of course China—ruled as the hot spot for investor attention. According to etf.com’s ETF screening tool, 55 ETFs focus on China, but only 20 on Japan. That says a lot about how the two countries’ stock markets have swapped places over the decades.

And so, Japan has regained in the spotlight. Maybe this time it will last. The rest of 2024 will tell us much about whether this ’80s stock market rock star is primed for a sustained comeback.