Japan / Nikkei (EWJ)

EWJ is the iShares MSCI Japan ETF, the largest US-listed Japanese-equity ETF with approximately $15 billion AUM. The fund holds roughly 200 Japanese stocks weighted by free-float market cap, with the top names including Toyota, Sony, Mitsubishi UFJ Financial Group, Keyence, and Tokyo Electron. The fund is unhedged, so EWJ returns reflect both Japanese-stock performance and JPY/USD exchange-rate moves.

Why it matters: EWJ is the cleanest US-listed exposure to Japanese equities, the second-largest developed-equity market after the US. Japan has been a multi-decade laggard versus US equities since the 1989 Nikkei peak, but the 2023-2025 corporate-governance reforms (Tokyo Stock Exchange ROE-improvement initiatives, increased buybacks, and unwinding of cross-shareholdings) have lifted the Nikkei to all-time highs in JPY terms. The unhedged EWJ structure means yen weakness compresses USD returns even when Nikkei rises.

EWJ has been firm in 2024-2026 with the Nikkei 225 trading near all-time highs in JPY terms, but EWJ in USD terms has lagged due to JPY weakness (USD/JPY near 159-160 in April 2026). The Bank of Japan policy normalization began in 2024 (ending negative rates and YCC) but has been gradual: BoJ policy rate at approximately 0.5% as of early 2026, with possible normalization to 1% in mid-2026.

The 300bp Fed-BoJ policy spread is the dominant driver of JPY weakness, which compresses EWJ USD returns. The bull case for EWJ is BoJ normalization combined with Fed cuts that compress the spread; the bear case is sustained spread plus structural Japanese demographics that limit growth. Watch Tokyo CPI (the leading Japan inflation gauge), BoJ policy meetings, and USD/JPY level for the EWJ direction.

EWJ has compounded approximately 4% annualized since 1996 launch, well below SPY because of the 1989-2012 Japanese bear market and JPY weakness. Major drawdowns: -55% in 2008-2009, -28% in 2022 (rate shock plus JPY collapse from 115 to 150). The three drivers are Japanese equity earnings (corporate governance reforms in 2023-2025 lifted ROE structurally), JPY/USD exchange rate (the unhedged-fund structure compresses USD returns on yen weakness), and BoJ policy (rate differentials versus the Fed).

First, USD/JPY level. Sustained moves below 145 would lift EWJ in USD terms 5-10% even with stable Nikkei.

Second, BoJ policy meetings. Any acceleration in normalization (rate hikes faster than market expects) would compress USD/JPY and lift EWJ.

Third, Tokyo Stock Exchange ROE-improvement metrics. Continued buyback growth and cross-shareholding unwinds support the structural bull case.