Japan ETFs Are Up 41%. Here’s How to Play the Takaichi Boom

Something remarkable is happening in Japan, and ETF investors are starting to notice.

The Nikkei 225 hit a record 63,799 on May 14 and is up 24% year to date—making it the best-performing major index in the world this year. The EWJ (iShares MSCI Japan ETF) has returned roughly 41% over the past 12 months. The currency-hedged DXJ (WisdomTree Japan Hedged Equity Fund) has done even better, returning nearly 46% over the same period.

For context, VOO is up about 8.7% year to date. The divergence between Japan and the U.S. is the widest it has been in over a decade.

The Takaichi Factor

Prime Minister Sanae Takaichi took office in late 2025 with a clear diagnosis: Japan’s economic stagnation was caused by excessive austerity, insufficient domestic investment, and overly restrictive labor regulations. Her administration has moved to fix all three.

Takaichi’s fiscal agenda targets state-led investment in artificial intelligence, semiconductors, and shipbuilding—sectors the government views as critical to Japan’s long-term productivity. Multi-year spending frameworks and long-term investment funds are designed to give businesses the predictability they need to commit capital.

The early results are encouraging. Japan’s Q1 2026 GDP expanded at a 2.1% annualized rate, beating the 1.7% consensus estimate. Private consumption and corporate investment both contributed to the upside surprise. Takaichi has signaled an extra budget to sustain momentum as consumers face rising energy and food costs from the Middle East conflict.

Why the Yen Matters for ETF Investors

The yen has weakened to around 158 per dollar—a level that creates a major performance gap between hedged and unhedged Japan ETFs.

When the yen weakens against the dollar, unhedged funds like EWJ lose some of their local-currency gains in the translation back to dollars. Hedged funds like DXJ neutralize that drag. Over the past year, DXJ returned roughly 46% compared to EWJ’s 41%—a gap explained almost entirely by currency.

The Bank of Japan faces a difficult balancing act. Stronger-than-expected producer inflation data is building the case for rate hikes, but raising rates too aggressively could derail the economic recovery Takaichi is engineering. If the BoJ stays patient, the yen likely weakens further—extending DXJ’s advantage. If it hikes, EWJ could close the gap as the yen strengthens.

How the Top Japan ETFs Compare

Not all Japan ETFs deliver the same exposure. The differences in strategy, cost, and currency handling matter significantly in this environment.

EWJ (iShares MSCI Japan ETF): The largest Japan ETF at $21 billion in assets. Tracks large- and mid-cap Japanese stocks. Unhedged, so yen movements directly affect dollar returns. Expense ratio of 0.49%. The default choice for broad Japan exposure.