For the first time that I can remember, my international allocation is overweight Japan. Japanese companies have remained globally competitive for customers, but not investors. Corporate efficiency has lagged and shareholders have suffered. Prime Minster Shinzo Abe’s reforms provide the needed push to make Japan a better place to invest.

The top ETF for Japan is the broadly diversified iShares MSCI Japan ETF (EWJ |B-99). While the vast majority of Japan ETFs are potential substitutes, the reforms driving potential appreciation are likely to be felt most in large-cap companies. A diversified, cap-weighted index provides consistent exposure to the Japanese stock market.

Investment Thesis

The bad side of Japan is well-known. Here’s the list:

  • The population is shrinking
  • The government debt problem is out of control
  • The society is too rigid to make changes
  • Abe has given up on structural change
  • Japanese companies are inefficient

However, the bad side of the Japan narrative represents an account assumed to be true simply because it matches our expectations…

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