In the global economy, tariffs are usually kryptonite for equity markets, particularly those of export-benchmarked economies. But on Wednesday, investors observing Japan ETFs saw a plot twist worthy of a geopolitical thriller.
Even though President Donald Trump declared a 15% tariff on Japanese imports, stocks such as the iShares MSCI Japan ETF (NYSE:EWJ), Franklin FTSE Japan ETF (NYSE:FLJP), First Trust Japan AlphaDEX Fund (NASDAQ:FJP), and WisdomTree Japan Hedged Equity Fund (NYSE:DXJ) surged sharply, with prices gaining 3.5%–5% by midday trading.
So what’s giving?
A $550 Billion Curveball
Trump’s declaration was anything but typical. In addition to the tariff, he released a gigantic trade deal with Japan, dubbing it the “largest deal in history.” The agreement features an agreement from Japan to invest $550 billion in the U.S. economy, its fine print still unclear.
That staggering figure sparked a wave of investor confidence, particularly among Japanese firms with American operations or plans for expansion. Auto manufacturers such as Toyota and Honda, and electronics leaders such as Sony, saw their stocks rise in Tokyo. This rally spilled over to U.S.-listed Japan ETFs.
Why ETFs Are Loving It
Following is what’s in the favor of Japan-themed ETFs even with headline risk:
Exporters are holding firm: The 15% import tax is considered by markets to be less disruptive than anticipated per Reuters, particularly given that numerous Japanese companies already have manufacturing operations in the U.S. or are in a position to ramp up domestic output.
Currency Hedging is Paying Off: DXJ, which offsets yen-dollar swings, is performing well as a result of a stable yen that makes Japanese exports competitive while protecting U.S. investors from currency risk.
Sector Tailwinds: Industrials, autos, and technology, sectors most heavily weighted in most Japan ETFs, are presently enjoying a combination of robust earnings, benign interest rates, and worldwide demand for AI-related infrastructure.
Deal Fatigue Relief: Following months of intensifying trade posturing, a concrete deal, albeit an unconventional one, gave the market a relief rally impetus.
Watch These ETFs
- EWJ: The largest and most liquid Japan ETF. Broad exposure makes it an investor sentiment gauge.
- FLJP: Provides similar exposure at a lower cost ratio (0.09% against EWJ’s 0.5%), also surfing the rally.
- DXJ: The big winner today, up more than 5% at one point on Wednesday, due to its hedged exposure and exposure to export-weighted large-caps.
- FJP: A smart-beta play riding cyclical momentum and earnings sentiment in Japanese stocks.
What’s Next?
Doubters will rightly ask how long a rally on high hopes and light specifics will last. However, for the moment, markets appear more concerned with capital inflows, corporate health, and Japan’s continued leadership in key global industries. If the investment promise holds out, the long-term potential for Japan-focused ETFs could run far beyond this short-term spike.
For now, however, one thing’s certain: the tariff tale has just become a whole lot more complex —and unexpectedly bullish.
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