The case for investing in Japan

While Japanese stocks have struggled lately, Heidi Richardson explains why there's still a case for investing in Japan.

Late last year, the Bank of Japan (BOJ) surprised investors with an unexpected adjustment of its stimulus program. While the central bank didn’t change the size of its asset purchase program, it did alter the composition of its purchases to include longer-duration bonds, Exchange Traded Funds (ETFs) and REITs.

Investors, however, had been hoping for more, and Japanese stocks struggled in response. The Nikkei 225 benchmark fell 1.9 percent on the day of the announcement, and has lost 1.7 percent since, according to Bloomberg data as of December 30.

But despite Japanese equities’ recent volatility, Japan remains one of the most compelling stock markets globally. Here’s why.

5 Reasons Investors Should Still Consider Japan

Attractive Valuations

As my colleagues and I write in our new Investment Directions monthly market commentary, Japanese valuations look particularly attractive relative to those of other major developed markets. As measured by both price-to-book (P/B) and price-to-earnings (P/E) ratios, Japanese stocks are trading at meaningful discounts to U.S. and European equities. For instance, according to Bloomberg data as of December 30, the MSCI Japan Index was trading at a P/E of 16.1, as compared with 23.3 for the MSCI European Index and 18.3 for the S&P 500.

Perhaps more importantly, Japanese stocks remain inexpensive even as they’ve outperformed their U.S. and European peers, Bloomberg data show. In U.S. dollar terms, Japanese stocks, as measured by the MSCI Japan Index, gained 5.9 percent in 2015 as of December 30, on improving earnings momentum, comfortably outperforming both U.S. and European equities (as measured by the S&P 500 and the MSCI European Index during the same time period).

Continuing Corporate Reforms

This long-term outperformance could continue, not least because the Japanese government has made it clear it’s serious about corporate reform, as part of Shinzo Abe’s three-arrow approach (known as “Abenomics“) involving massive monetary stimulus, increased government spending and significant economic reforms. For instance, just over the last couple of months, the government has announced initiatives including corporate tax cuts. Such reforms could help boost earnings, especially as they’re occurring against the backdrop of a gradually improving economy.

Improving Return on Equity (ROE)

Japanese firms, meanwhile,  have placed an emphasis on returning cash to shareholders in the form of dividends and buybacks. According to Bloomberg data as of December 30, ROE in Japan was up 49 percent from year-end 2012, and could increase further this year, assuming Japanese companies can continue to improve their profitability.

Increased Demand for Japanese Stocks

The BOJ and other large institutions have increased their investments in Japanese equities. Meanwhile, the recent successful Japan Post initial public offering has renewed domestic interest in equities and likely increased demand for Japanese equities by investors around the globe.

A Still Market-Friendly Central Bank

Finally, it’s important to put the recent BOJ announcement in context. While the Federal Reserve (Fed) has begun the process of rate normalization, the BOJ remains in a stimulus mode, as it seeks to help the Japanese economy avoid slipping into a recession. This divergence may help support local earnings. In addition, as local inflation remains below the BOJ’s target, the recent announcement expanding the BOJ’s purchasing options may even be a sign of additional supportive measures coming soon out of the central bank.

To be sure, the Japanese market does face potential headwinds, including high public debt and an aging population. In addition, further Chinese yuan devaluation spells trouble for Japanese exporters. However, for the reasons mentioned above, I believe there’s still a very strong case for investing in the Land of the Rising Sun.

That said, investors should consider at least a partial hedge on yen exposure. Amid central bank and growth divergence, the U.S. dollar seems poised to strengthen against the yen over the longer term. ETFs such as the iShares MSCI Japan ETF (EWJ) or the iShares Currency Hedged MSCI Japan ETF (HEWJ) can provide access to the Japanese market.


Heidi Richardson is a Global Investment Strategist at BlackRock. She is also Head of Investment Strategy for U.S. iShares.


Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting or Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Index returns are for illustrative purposes only.  Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index returns do not represent actual iShares Fund performance. For actual fund performance, please visit or

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

The iShares Currency Hedged MSCI Japan ETF’s use of derivatives may reduce the Fund’s returns and/or increase volatility and subject the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited.  There can be no assurance that the Fund’s hedging transactions will be effective. Investment in a fund of funds is subject to the risks and expenses of the underlying funds.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

This material does not constitute any specific legal, tax or accounting advice. Please consult with qualified professionals for this type of advice.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.

©2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners. iS-17470-0116