S&P 500 vs Japan

EWJ tracks MSCI Japan Index covering 200+ Japanese large- and mid-cap equities. Country: 100 percent Japan. Top holdings April 2026: Toyota Motor ~5 percent, Sony Group ~3 percent, Mitsubishi UFJ Financial ~3 percent, Tokyo Electron ~2.5 percent, Hitachi ~2.5 percent, Sumitomo Mitsui Financial ~2 percent, Recruit Holdings ~2 percent, Keyence ~2 percent, Fast Retailing ~2 percent, ITOCHU ~2 percent.

Sector weights: Industrials ~20 percent, Consumer Discretionary ~17 percent (Toyota, Sony), Financials ~13 percent (Mitsubishi UFJ, Sumitomo Mitsui), Tech ~13 percent (Sony semiconductors, Tokyo Electron, Keyence), Healthcare ~10 percent (Daiichi Sankyo, Takeda), Consumer Staples ~7 percent, Materials ~7 percent, Communications ~6 percent.

EWJ AUM approximately $14 billion. Expense ratio 0.50 percent. The fund is unhedged: USD investors bear full JPY currency exposure. EWJ vs DXJ (yen-hedged Japan) comparison is a separate hedging-decision trade where currency view matters.

The Tokyo Stock Exchange (TSE) launched a multi-year corporate governance reform program in 2023 that has been the central driver of Japanese equity outperformance. The TSE pushed companies trading below 1.0x price-to-book to either improve capital efficiency (raise ROE through buybacks, asset sales, dividend increases) or risk delisting from prime market segment.

Results through 2025-2026: Japanese share buybacks reached approximately 12 trillion yen ($82 billion) in 2024, up 60 percent from 2022. Dividend payments increased 25 percent over same period. Cash on Japanese corporate balance sheets declined from 60 percent of market cap to ~50 percent through repatriation to shareholders. Japanese ROE rose from 8.5 percent in 2022 to 10.5 percent in 2025.

The reform is structural, not cyclical. TSE continues monitoring P/B ratios and pushing reluctant companies. Major holdings like Toyota, Sony, and Mitsubishi UFJ have all announced major capital return programs. The 2026-2030 outlook continues the reform trajectory.

BoJ exited negative interest rates in March 2024 (first hike in 17 years) ending a decade-long unconventional monetary policy era. Subsequent rate hikes through 2024-2026 took policy rate from 0.0 percent to 0.75 percent (0.25 percent July 2024, 0.50 percent January 2025, 0.75 percent October 2025; held at 0.75 percent on April 28, 2026, the highest rate since 1995). The exit fundamentally changed Japanese banking economics.

Mitsubishi UFJ, Sumitomo Mitsui, Mizuho (combined ~10 percent of EWJ) have benefited massively. Net interest margins expanded from 0.8 percent to 1.2 percent through cycle. Japanese bank stocks rallied 50-80 percent over 2024-2026.

The normalization of Japanese monetary policy also affects yen dynamics. Higher BoJ rates support yen strengthening; lower BoJ rates support weakening. The 2024-2026 BoJ hikes have been gradual enough that yen has continued weakening on Fed differential, but the trajectory is shifting. USDJPY peaked at 162 in mid-2024 and has settled around 158-160 in April 2026, with the yen still near multi-decade lows.

JPY has weakened approximately 30 percent versus USD over 2022-2024, providing material competitive advantage to Japanese exporters. Toyota (5 percent of EWJ) and other auto exporters benefit directly: each 10-yen weaker JPY adds approximately $4 billion to Toyota annual operating profit.

Sony, Tokyo Electron, Hitachi, and other technology exporters similarly benefit. Sony PlayStation pricing in USD with JPY cost base produces substantial margin expansion. Tokyo Electron semiconductor equipment sells in USD to TSMC, Samsung, etc.

The currency contribution to Japanese earnings has been substantial. MSCI Japan trailing 12-month earnings grew approximately 35 percent through 2024-2025, with currency contributing approximately 12 percentage points and underlying earnings growth contributing 23 percent. The combination produced exceptional EPS growth that supported Nikkei 42,000 multi-decade highs.

EWJ is unhedged: USD investors bear full JPY currency exposure. The 2022-2024 JPY weakness created an unusual scenario where Nikkei rose strongly in JPY terms but USD-investor returns were lower due to currency drag. EWJ underperformed Nikkei in this period.

The 2026 setup has reversed somewhat. JPY has stabilized around 150-155 USDJPY (down from 162 peak). EWJ now captures full Japanese equity gains for USD investors with currency neutral-to-slightly-positive contribution.

For USD investors who want pure Japanese equity exposure without currency risk, DXJ (WisdomTree Japan Hedged Equity ETF) hedges JPY exposure. DXJ has outperformed EWJ during yen-weakness episodes by approximately 5-10 percentage points but underperforms during yen-strength episodes. The EWJ-vs-DXJ choice is a JPY directional bet separate from Japanese equity selection.

Five regimes describe SPY-vs-EWJ. Regime 1 (post-Plaza Accord 1985-1989): EWJ massively outperformed SPY by 200+ percentage points cumulatively as Japanese asset bubble inflated. Regime 2 (1990-2012 Lost Decades): EWJ massively underperformed SPY by 350+ percentage points cumulatively as Japanese deflation persisted. Regime 3 (Abenomics 2013-2019): EWJ approximately tracked SPY as Abenomics monetary stimulus and structural reforms began. Regime 4 (2020-2024): EWJ underperformed SPY by 30+ percentage points as US tech dominated. Regime 5 (current 2025-2026): EWJ outperforming SPY by 14.7pp trailing 12 months.

The long-run pattern: Japanese equities have multi-decade cycles dominated by domestic policy and corporate-governance dynamics. The 1985-1989 bubble, 1990-2012 deflation, 2013-2019 Abenomics, 2020-2024 underperformance, 2025-2026 reform-driven rally all represent distinct regimes with multi-year duration.

EWJ realized volatility is approximately 18 percent annualized vs SPY 16-17 percent. The 1.1x volatility ratio is moderate. EWJ in JPY terms has lower volatility (~14 percent) than EWJ in USD terms (~18 percent), reflecting currency contribution.

60-day rolling correlation between SPY and EWJ averages approximately 0.65. During risk-off periods correlation rises to 0.80-0.85; during Japan-specific episodes drops to 0.40-0.55. Current April 2026 correlation approximately 0.50, reflecting the Japan-specific reform-driven rally regime.

For pair-trade sizing, the 1.1x volatility plus 0.65 correlation produces a hedge ratio of approximately 0.70 SPY per 1 EWJ (dollar-weighted) for beta-neutral positioning. The pair is moderately actively traded, with EWJ AUM of $14 billion providing good liquidity.

A recent setback: Japan ETFs (EWJ, DXJ, BBJP) declined 9 percent over a one-month period during the Iran war oil shock in early 2026. Japan is highly oil-import-dependent (95 percent of energy imports), so oil price spikes hurt Japanese economy directly.

The Iran war impact has been temporary. As Iran ceasefire negotiations progressed through April 2026 and oil prices retraced from $105 peak toward $95 then lower, Japanese equity rally has resumed. EWJ recovered approximately 5 percent of the 9 percent decline by mid-April.

The Iran war episode illustrates that EWJ's structural rally is vulnerable to oil-price shocks. Continued Iran ceasefire confirmation supports EWJ rally extension. Iran escalation reverses gains as oil price impacts Japanese economy disproportionately.

For pair traders, the SPY/EWJ ratio currently trades at approximately 8.7 (SPY $708 / EWJ $81). The 12-month range is approximately 8.0 to 11.0. The 5-year range is 8.0 to 14.0 (SPY peak in late 2024). Above 11.0 indicates SPY extreme outperformance; below 8.0 indicates broader EWJ rally.

Long SPY / short EWJ captures continued US dominance: benefits from dollar strength, AI translation success, US tech leadership, recession scenarios with Japanese commodity import drag. Long EWJ / short SPY captures Japanese rotation: benefits from continued TSE reforms, BoJ rate hikes, JPY stabilization, AI translation questions, Iran ceasefire confirmation. Position sizing should account for EWJ 18 percent annualized volatility versus SPY 16-17 percent.

The pair has produced highly variable returns. From 1990-2012 cumulative long SPY short EWJ gained 350+ percentage points (lost decades). From 2025-2026 long EWJ short SPY has gained 14.7 percentage points trailing 12 months. The current regime appears structural rather than cyclical based on TSE reform durability.

SPY ~$708, EWJ ~$81, ratio 8.7. EWJ trailing 12 months +31.7% vs SPY +17%. Nikkei 225 ~42,000 multi-decade highs. JPY at USDJPY 158-160 (down from 162 peak mid-2024). BoJ policy rate 0.75% (held April 28 2026; up from 0.0% March 2024 via 0.25% July 2024, 0.50% January 2025, 0.75% October 2025; highest since 1995). Japanese share buybacks ~12 trillion yen 2024 (+60% from 2022).

Forward-looking: TSE reform continuation supports continued Japanese equity outperformance. BoJ rate trajectory (cautious normalization) affects yen and bank stocks. Iran war duration affects Japanese equities through oil price channel. April 30 mega-cap tech earnings affect SPY direction; SPY weakness extends EWJ relative outperformance. Q1 2026 Japanese earnings season (April-May) provides corporate fundamentals visibility.

Watch the SPY/EWJ ratio for moves outside 8.0 to 11.0. Below 8.0 indicates structural Japanese revival further extending. Above 11.0 indicates US exceptionalism reasserting. The pair offers exposure to Japanese corporate governance reform, BoJ normalization, and yen dynamics simultaneously through one trade.