Is Japan Back?

Episode Summary

Executive Summary: The episode argues that Japan may be entering a new investment phase under Prime Minister Sanae Takaichi, but the deeper case is that Japan has long offered compelling value—especially in hedged equity exposure like DXJ. Jeremy Schwartz says investors often misread currency hedging, that Japan’s market is cheap versus the U.S., and that geopolitics, defense spending, and policy support could boost equities even if the yen remains volatile.

Main Topics: Japan investment case and whether it is ‘back’ (Priority: 5/5): The hosts revisit Japan as a major ETF and macro theme, asking whether the market’s recent momentum and new leadership signal a renewed opportunity or just another cycle in an old story. Currency hedging and the DXJ thesis (Priority: 5/5): A central focus is WisdomTree’s Japan Hedged Equity ETF (DXJ), which benefits when the yen weakens and investors receive carry from rate differentials. Schwartz argues hedging is often misunderstood and that unhedged investing is itself a currency bet. Takaichi, Abe-style policy, and domestic reform (Priority: 4/5): The conversation frames Sanae Takaichi as an Abe-like, pro-growth leader whose policies could support equities through fiscal stimulus, tax changes, and a potentially weaker currency, though political execution remains uncertain. Japan as a global growth and tech supply-chain play (Priority: 4/5): Rather than viewing Japan only as a slow domestic economy, Schwartz emphasizes its role in global industrials, semiconductors, AI infrastructure, and export-oriented businesses. Valuation and relative attractiveness vs. U.S. stocks (Priority: 5/5): Japan is presented as an ‘inverse bubble’: low valuations, higher earnings yields, and strong buybacks/dividends compared with expensive U.S. markets, especially the S&P 500 and Mag 7. Geopolitics, defense, and China exposure (Priority: 3/5): The episode highlights defense spending, Taiwan risk, and Japan’s strategic role in U.S.-China competition. Schwartz says Asia defense could be a major ETF theme over the next few years. WisdomTree’s ETF product strategy and currency-hedging legacy (Priority: 3/5): The discussion broadens into how WisdomTree built its brand with speedboat-style ETF marketing around DXJ, then diversified into other products like gold overlays and dynamic hedging strategies.

Key Arguments: Japan has not ‘left’ as an opportunity; investors left after misreading the currency and the cycle, but Japanese equities and hedged products can still outperform depending on the macro setup. Currency hedging is not exotic; it is often the more neutral default, while owning foreign stocks unhedged is effectively a bet on the foreign currency. DXJ is structurally attractive today because hedging currently adds roughly 3.5% to 4% carry, making the unhedged investor start at a disadvantage. Japan should be viewed as a global growth and industrial supply-chain market, not just a domestic economy with a declining population. Japan is cheap relative to the U.S.: lower P/E multiples and higher earnings yields create a stronger long-term value case. Takaichi may support equities through pro-growth policies, but the currency reaction is uncertain because higher spending, delayed rate hikes, or political constraints could push in different directions. Defense exposure is becoming more important because Japan is increasingly central to the U.S.-China geopolitical contest and Taiwan security discussions. WisdomTree’s earlier DXJ success showed that strong performance plus a clear narrative can make a currency-hedged ETF a category leader, but it is hard to get a second bite at the apple once the initial trade fades.

Data Points: DXJ inflows in 2013: $9 billion - Referenced as the last ETF outside Vanguard/iShares to win the annual flow crown. DXJ vs. S&P 500 since 2012: DXJ has beaten the S&P 500 - Schwartz cites DXJ as one of the few international funds to outperform U.S. equities over the period. MSCI EAFE annual return since 2012: ~7% per year - Used to illustrate international underperformance versus U.S. stocks. S&P 500 annual return since 2012: ~15% per year - Benchmark for comparison with international and Japan strategies. Compounded growth since 2012: ~150% vs. ~500% - Schwartz compares international returns to the S&P 500 over 13 years. Year-to-date return for non-hedged Japan: ~18% - Current performance snapshot discussed early October. Year-to-date return for DXJ: ~18% - Shown as roughly matching the non-hedged Japan fund and outperforming the S&P 500. Year-to-date return for S&P 500: ~13% - Used as a U.S. equity benchmark. Carry on hedged Japan exposure: ~3.5% to 4% - Schwartz says investors are effectively paid this amount today for hedging FX risk. Carry range mentioned later: ~5% to 6% - Referenced as recent carry conditions from U.S.-Japan rate differentials. Yen level during Abe era: ~80 yen per dollar - Starting point when Abe took power, described as overly strong yen. Current yen level: Over 150 yen per dollar - Illustrates how much the currency has moved since Abe’s policy era. DXJ valuation: ~14.5x P/E - Compared with the S&P 500 to support the Japan value case. S&P 500 valuation: ~23x P/E - Used to highlight U.S. market richness relative to Japan. Japan Opportunities Fund valuation: ~12.5x P/E - Schwartz says this Buffett-linked strategy offers even better value. Japan Opportunities earnings yield: ~8% - Cited as a high-quality value proposition. S&P 500 earnings yield: ~4% to 5% - Used in contrast with Japan’s higher earnings yields. Japan debt-to-GDP: ~250% - Presented as extremely high compared with the U.S., but not necessarily inflationary. U.S. debt-to-GDP: ~130% - Mentioned for comparison with Japan. Nikkei breakout level: 48,000 - Alluded to as a major technical breakout, near the 1989 peak. Nikkei historical peak: 1989 - Referenced as the prior bubble-era high now being revisited. Gold-linked performance: Up 50% year to date - Used in discussing WisdomTree’s gold overlay products. GPMN performance: Up 180% - Performance cited for the miners-plus-gold strategy. Product structure: 90/90 - The gold overlay and basket products are described as 90% stocks / 90% futures.

Pivotal Quotes: "Japan never left." — Jeremy Schwartz: Schwartz’s core rebuttal to the idea that Japan is newly investable; he argues the opportunity was always there but misunderstood. "The thesis is she's good for the equities. She might not be good for the currency." — Jeremy Schwartz: Summarizes the investment case for Takaichi: pro-growth policy can help stocks even if FX volatility persists. "Really? Do you want to bet on the Euro?" — Jeremy Schwartz: Used to argue that owning foreign stocks unhedged is itself a currency bet, and often an unnecessary one.

Implications: For investors, Japan offers a potentially attractive value-and-policy setup, especially via hedged ETFs. More broadly, the episode suggests currency risk, geopolitics, and valuation may matter more than simple regional labels when building international portfolios.