Next Year Could be a 2013 Sequel for Japan ETFs

The db X-trackers MSCI Japan Hedged Equity Fund (DBJP) is up 34.5% this year while the rival WisdomTree Japan Hedged Equity Fund (DXJ) has surged 30%. Asking for anything resembling repeat performances next year may sound greedy, but not impossible.

Concerns linger about Japan’s economy, the world’s third-largest, including familiar refrains such as the country’s high debt-to-GDP ratio, an aging population and the adverse impact of the weak yen on energy-poor Japan’s trade balance.

However, some market observers remain bullish on the land of the rising sun even as it has been 2013’s top-performing global market in local currency terms. [10 Best Global Markets by ETFs]

“The Japanese economy is just one step away from a virtuous cycle (corporate earnings growth leading to increased capex, resulting in wage hikes, supporting higher consumer spending, then back full circle to corporate earnings growth),” said Kazuhiro Miyake, Daiwa’s chief Japan strategist, in a note obtained by CNBC.

For income investors, Japan’s status as one of the ex-U.S. developed markets that is not a great dividend destination could change for the better.

“With Japanese equities one has the potential to see dividends grow over time. Over the last 10 years, dividend growth in Japan has averaged about 7.6% per year 2 . Dividend-paying stocks could thus be an attractive income source that offers a potential inflation,” said WisdomTree Research Director Jeremy Schwartz in a note earlier this month. [WisdomTree: Enticing Japanese Dividends]

Nomura is among the banks forecasting a 2014 rally in Japanese equities. The bank “the Nikkei to hit 16,000 by the end of March, slip to 15,000 by the end of June and then climb to 18,000 by the end of December. It expects the Topix index at 1500 by the end of 2014,” according to CNBC. [Japan ETFs: An Epic Move Could be Afoot]

Japan ETFs have recently shown some signs of perking up. DBJP is higher by nearly 3% in the past month. The new WisdomTree Japan Hedged SmallCap Equity Fund (DXJS) , DXJ’s small-cap cousin, is up almost 2% over the same time.

Last week, it was reported that WisdomTree could introduce five sector equivalents of DXJ, which features a short USD/JPY component.

WisdomTree Japan Hedged Equity Fund

Tom Lydon’s clients own shares of DXJ.