News

Exploring Prospects in Japan

Equity markets in Japan maintain their appeal, despite a 17-year high in 10-year JGB yields, indicating strong investor faith in structural reforms and enhanced trade relations. Dive in for more.

, and Administrator

2025 September 5 . 4:07 AM

2 min read

Exploring Prospects in Japan

In the ever-evolving world of global finance, Japan continues to present a compelling opportunity within international equity allocations. This assertion is supported by recent developments and insights from financial experts at WisdomTree, a leading asset management firm.

Markets are cautiously optimistic that the Japanese government can steer policy by aligning with independents and friendly opposition groups, potentially paving the way for continued reforms. This optimism is further bolstered by the ruling coalition's focus on corporate reforms, geopolitical tailwinds, and rising domestic demand, as outlined in WisdomTree Model Portfolios.

One key factor contributing to Japan's attractiveness is the comparatively higher earnings yields offered by its equities. Despite the changing dynamics in the equity and bond markets of the U.S. and Japan over the past few years, Japanese equities still hold an edge. For instance, the Japanese equity risk premium, based on prevailing estimated earnings yields and 10-Year JGB inflation-indexed yields, currently stands at 6.7%.

Moreover, export-oriented stocks, such as those targeted by the WisdomTree Japan Hedged Equity Fund (DXJ), currently supply an additional 1.3% above the market cap-weighted MSCI Japan Index's equity risk premium and 8% in total.

WisdomTree offers a special focus on deeper value-oriented Japanese stocks through specific funds. The WisdomTree Japan Opportunities Fund (OPPJ), for example, focuses on deeper value stocks, offering a forward earnings yield of 8.66% greater than that of the 10-Year inflation-indexed JGB.

The flattening in the JGB yield curve is a result of higher expectations for Bank of Japan action and a slight easing of long-term fiscal concerns. This is evident in the 10-Year JGB yield elevating to 1.6%, the highest in 17 years. However, the forward earnings yield on the S&P 500 is only 2.3% greater than the yield currently offered by 10-Year Treasury Inflation-Protected Securities (TIPS), which is nearly 3% below its longer-term median of 5.1%.

The announcement of a U.S.-Japan trade deal, which reduces tariffs on automobiles and parts but maintains steep duties on Japanese steel and aluminum exports, has further added to the optimism surrounding Japan's economic future. BoJ Deputy Governor Uchida called the trade deal "a very big step forward."

However, the path toward policy normalization appears a bit clearer, with another rate hike not expected just yet. The Prime Minister quickly denied rumors of his resignation following the ruling coalition's narrow loss of its Upper House majority, causing speculation about his possible resignation.

In conclusion, Japan's attractive earnings yields, coupled with ongoing reforms and geopolitical tailwinds, make it an appealing choice within international equity allocations. Financial experts at WisdomTree, such as Brian Manby, Senior Associate, Investment Strategy, and Behnood Noei, Director of Fixed Income, are actively working to create and analyse model portfolios that capitalise on these opportunities. Andrew Okrongly, Director on the Model Portfolios Team, is responsible for the design and ongoing management of model portfolios and custom solutions for portfolio managers and advisors. As always, it is crucial to conduct thorough research and consider individual investment objectives when making decisions.