While Japan is the second largest economy in the world, investors seem to have passed the island nation over in favor of other Asian markets, particularly China. Japan’s export-dependent economy has been hampered for years by artificially low interest and monetary policy that can only be deemed foolhardy. In addition to China, investors have favored smaller Asian markets such as South Korea, Singapore, and others over Japan. This is a telling sign of how far Japan has fallen off of investors’ radars.

Things have gotten so bad for Japan that one could argue Japanese stocks have been in a bear market for nearly two decades. In fact, we’ve lamented the ill fortunes of Japan’s economy in the past, talking about the slack economic output earlier this year.

All that said, things may be looking up Japan. For US-based investors, there are ten ETFs that focus on Japan, with iShares MSCI Japan Index (EWJ) being the most popular. EWJ has lagged the S&P 500 year-to-date, but that’s not really surprising. What you may not be aware of is that Japanese stocks have actually been doing better than their US counterparts since the first quarter of 2002 (more than seven years). The one-year return of EWJ has been about the same as the S&P 500, though not nearly as volatile.

There are some fundamental factors that Japan’s economy has in its favor (for once). Japan is benefiting from eased tensions between China and Taiwan. Japan actually counts China as a larger trading partner than the USA at this time. Japan’s close proximity to China, combined with its status as a prime exporter of products that China’s burgeoning middle class will crave (think TVs and automobiles) make Japan a compelling indirect China play.

Some press reports also noted that Japan’s money multiplier is positive for the first time in more than two decades. This is yet another positive sign. Political change in Japan may be afoot with the Democratic Party of Japan gaining some ground against the Liberal Democratic Party. Some Japan observers argue they’ve been in power for far too long.

EWJ’s top holdings are makers of products many stateside investors are familiar with. Toyota Motor (TM) is the ETF’s largest position, and other familiar top holdings include Honda Motor (HMC), Tokyo Electron, Nintendo (NTDOY), Sony (SNE), Canon (CAJ), and Panasonic (PC). Consumer discretionary is the largest sector at 19.6%, followed by industrials 18.8%, financials 17.6%, and technology 12.8%.

All of the positive fundamentals that may boost Japan’s economic fortunes could take a while to play out. Therefore, it may not be reasonable to expect EWJ, or other ETFs that invest in Japan, to produce outsized returns in the near-term. We have focused on EWJ in this discussion, as it is the most liquid ETF of the ten Japan ETFs listed below. Some of the others have very sparse trading activity, so be sure to check volume and bid-ask spreads before placing your trade.

  1. iShares MSCI Japan (EWJ) (fund overview)
  2. iShares MSCI Japan Small Cap (SCJ) (fund overview)
  3. iShares S&P/TOPIX 150 (ITF) (fund overview)
  4. PowerShares FTSE RAFI Japan (PJO) (fund overview)
  5. ProShares UltraShort MSCI Japan (EWV) (fund overview)
  6. ProShares Ultra MSCI Japan (EZJ) (fund overview)
  7. SPDR Russell/Nomura PRIME Japan (JPP) (fund overview)
  8. SPDR Russell/Nomura Small Cap Japan (JSC) (fund overview)
  9. WisdomTree Japan Small Cap Dividend (DFJ) (fund overview)
  10. WisdomTree Japan Total Dividend (DXJ) (fund overview)