The rally in Japanese stocks is expected to continue in the second half of the year, according to BlackRock Investment Institute, but the best way for U.S. investors to participate in it could change. The firm said in its mid-year outlook that an overweight position in Japanese stocks is one of its highest-conviction calls. Wei Li, the institute’s global chief investment strategist, said at a media event on Tuesday that the firm believes Japanese stocks can grow earnings faster than the consensus estimate of 7.5% over the next year. “We think the micro case for Japanese stocks remains very strong,” Li said. Many Americans have already flocked to funds tracking Japanese stocks, part of an overall increase in foreign investor capital. Broad Japanese stock exchange-traded funds in the U.S. have raised about $4 billion from investors so far this year, according to FactSet. But one problem with BlackRock’s outlook is that its recommendations are heavily weighted toward unhedged Japanese investments. That’s a notable difference. That’s because the yen’s historic depreciation against the U.S. dollar has created a large divergence among Japan-focused ETFs. For example, the company’s iShares MSCI Japan ETF (EWJ) is up about 10% year to date, while the currency-hedged MSCI Japan ETF (HEWJ) is up 28.7%. Funds from other issuers have seen a similar distribution between hedged and unhedged options. HEWJ piles up YTD Currency-hedged Japan funds like HEWJ are outperforming unhedged funds in 2024. Lee said that while the currency impact is “a real inconvenience” for many investors, there is reason to believe the yen will stabilize over the coming year, especially with national elections looming in 2025. “As we head into election season, a weaker currency won’t help that much, and we might expect some intervention. Even if it’s not direct intervention, it’s kind of encouraging repatriation, encouraging inflows from abroad, which could support currency stability,” Lee said. She also noted that rising interest rates in Japan could provide further support for the yen.BlackRock isn’t the only bullish on Japan. Goldman Sachs Asset Management said in its interim outlook that “we expect Japan’s equity market to remain resilient, driven by structural changes.”
