Japan ETFs Are Up 41%. Here’s How to Play the Takaichi Boom
Japanese stocks are having their best year in decades, with the Nikkei 225 up 24% and EWJ delivering 41% over the past 12 months. Prime Minister Takaichi’s economic reforms, a GDP beat, and a weaker yen are fueling a rally that’s making U.S. markets look pedestrian by comparison.
Something remarkable is happening in Japan, and ETF investors are starting to notice.
The Nikkei 225 hit a record 63,799 on May 14 and is up 24% year to date—making it the best-performing major index in the world this year. The EWJ (iShares MSCI Japan ETF) has returned roughly 41% over the past 12 months. The currency-hedged DXJ (WisdomTree Japan Hedged Equity Fund) has done even better, returning nearly 46% over the same period.
For context, VOO is up about 8.7% year to date. The divergence between Japan and the U.S. is the widest it has been in over a decade.
The Takaichi Factor
Prime Minister Sanae Takaichi took office in late 2025 with a clear diagnosis: Japan’s economic stagnation was caused by excessive austerity, insufficient domestic investment, and overly restrictive labor regulations. Her administration has moved to fix all three.
Takaichi’s fiscal agenda targets state-led investment in artificial intelligence, semiconductors, and shipbuilding—sectors the government views as critical to Japan’s long-term productivity. Multi-year spending frameworks and long-term investment funds are designed to give businesses the predictability they need to commit capital.
The early results are encouraging. Japan’s Q1 2026 GDP expanded at a 2.1% annualized rate, beating the 1.7% consensus estimate. Private consumption and corporate investment both contributed to the upside surprise. Takaichi has signaled an extra budget to sustain momentum as consumers face rising energy and food costs from the Middle East conflict.
Why the Yen Matters for ETF Investors
The yen has weakened to around 158 per dollar—a level that creates a major performance gap between hedged and unhedged Japan ETFs.
When the yen weakens against the dollar, unhedged funds like EWJ lose some of their local-currency gains in the translation back to dollars. Hedged funds like DXJ neutralize that drag. Over the past year, DXJ returned roughly 46% compared to EWJ’s 41%—a gap explained almost entirely by currency.
The Bank of Japan faces a difficult balancing act. Stronger-than-expected producer inflation data is building the case for rate hikes, but raising rates too aggressively could derail the economic recovery Takaichi is engineering. If the BoJ stays patient, the yen likely weakens further—extending DXJ’s advantage. If it hikes, EWJ could close the gap as the yen strengthens.
How the Top Japan ETFs Compare
Not all Japan ETFs deliver the same exposure. The differences in strategy, cost, and currency handling matter significantly in this environment.
EWJ (iShares MSCI Japan ETF): The largest Japan ETF at $21 billion in assets. Tracks large- and mid-cap Japanese stocks. Unhedged, so yen movements directly affect dollar returns. Expense ratio of 0.49%. The default choice for broad Japan exposure.
DXJ (WisdomTree Japan Hedged Equity Fund): Currency-hedged, focusing on dividend-paying, export-oriented Japanese companies. Has pulled in $480 million in net new assets in 2026. Expense ratio of 0.48%. The pick for investors who want Japan equities without yen risk.
BBJP (JPMorgan BetaBuilders Japan ETF): Similar broad, unhedged exposure as EWJ but at 0.19% expense ratio—less than half the cost. Returned roughly 30% over the past year. The low-cost alternative that more investors are discovering.
For a detailed side-by-side of holdings, sector weights, and performance, use the ETF.com Comparison Tool.
What Could Go Wrong
Japan’s rally is not without risks. The Nikkei dropped nearly 2% in a single week in mid-May as Bank of Japan rate concerns triggered profit-taking in the AI and semiconductor names that have driven much of the index’s gains.
A more aggressive BoJ tightening cycle could strengthen the yen rapidly, hurting export-dependent companies and narrowing the performance gap between hedged and unhedged ETFs. Hormuz Strait disruptions from the Iran conflict are pushing energy costs higher for Japan—a net energy importer—and could weigh on consumer spending.
And while Takaichi’s fiscal agenda is ambitious, Japan’s debt-to-GDP ratio already exceeds 235%. Markets will eventually ask how the spending gets financed. Japan’s own 30-year yield recently hit an all-time high, a signal that bond investors are starting to price in fiscal risk.
Japan is delivering the kind of returns that force portfolio reallocation conversations. A 41% gain from EWJ over the past year—while the S&P 500 has essentially gone sideways—challenges the U.S.-centric default that has dominated most investor portfolios for a decade.
The Takaichi administration’s pro-growth reforms, a GDP beat, and corporate governance improvements are all structural tailwinds. The tactical question is currency: DXJ for a continued weak yen, EWJ or BBJP if you think the BoJ will eventually push the yen higher.
Track real-time flows into Japan ETFs using the ETF.com Fund Flow Tool, and compare EWJ, DXJ, and BBJP head-to-head with the ETF.com Comparison Tool.
