This MSCI Japan ETF Has Had a Sneaky Good Run, Soaring 23% While Everyone Slept on It

While U.S. investors piled into domestic equities throughout 2025, Japan quietly delivered one of the year’s strongest performances. The iShares MSCI Japan ETF (NYSEARCA:EWJ | EWJ Price Prediction) returned 29% over the past year, crushing the S&P 500’s 17% gain by 12 percentage points.

For 2026, Japan’s setup looks compelling. Corporate governance reforms continue reshaping capital allocation, pushing firms toward shareholder returns rather than cash hoarding. The Bank of Japan raised rates to their highest level in 30 years, signaling economic normalization after decades of deflation. BlackRock’s 2026 outlook notes sustained investor interest in Japanese equities, driven by structural improvements rather than momentum trades.

What EWJ Actually Delivers

This ETF provides exposure to 187 large and mid-cap Japanese companies through MSCI Japan Index replication. The portfolio leans into Japan’s industrial and technology strengths, with Toyota Motor at 4.5%, Mitsubishi UFJ Financial at 4.0%, and Sony Group at 3.5% leading holdings. The top 10 positions represent 28% of assets.

The return engine combines equity appreciation from Japanese corporate performance and currency movement through unhedged yen exposure. When Japanese stocks rise and the yen strengthens against the dollar, returns amplify. When the yen weakens, it creates a headwind. The yen has depreciated roughly 6% since September 2025, trading at 0.00639 USD per yen as of early January 2026, yet EWJ still delivered strong returns as equity gains overwhelmed currency drag.

With a 0.49% expense ratio and $15.8 billion in assets, EWJ offers deep liquidity and nearly 30 years of operational history. The 6% portfolio turnover rate makes it exceptionally tax-efficient for taxable accounts. The 1.34% dividend yield provides modest income.

The Currency Decision You’re Making

Choosing EWJ means accepting currency risk. Over the past five years, this unhedged structure hurt performance significantly. The WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ) returned 213% during that period versus EWJ’s 39%, with most of that gap attributable to cumulative yen depreciation.

However, currency hedging isn’t free. DXJ carries a 0.48% expense ratio but maintains 36% portfolio turnover versus EWJ’s 6%, creating higher internal trading costs and potential tax inefficiency. The hedged structure also caps potential upside if the yen strengthens materially.

For investors who believe the yen has bottomed or expect BOJ policy normalization to support currency stability, EWJ’s unhedged approach offers asymmetric upside. The 98.55% probability that prediction markets assign to no rate change at the January 23 BOJ meeting suggests policy stability rather than further easing.

Who Should Skip This

Investors seeking pure equity exposure without currency complications should choose DXJ instead. The hedged structure eliminates yen volatility, which has created 4% weekly swings during turbulent periods like October 2025.

Income-focused portfolios will find EWJ’s 1.34% yield insufficient. Japanese companies historically prioritize balance sheet strength over dividends, and while governance reforms are pushing higher payouts, this remains a growth-oriented allocation.

The Better Alternative for Most Investors

DXJ serves a similar portfolio role but eliminates currency risk through active hedging. DXJ delivered 36% returns over the past year versus EWJ’s 29%, with the 7-percentage-point advantage coming entirely from hedging out yen weakness. The dividend yield of 2.18% also exceeds EWJ’s 1.34%.

The tradeoff is higher turnover and slightly more complex mechanics, but for investors who want Japanese equity exposure without taking a view on currency direction, DXJ’s hedge makes it the cleaner choice. Both funds charge essentially the same fee.

EWJ works best for investors who believe in Japan’s structural reforms and see the yen as undervalued or stabilizing, accepting short-term currency volatility for potential dual gains from both equities and currency appreciation.