Yen Shift Puts Spotlight On EWJ Valuation

The Japanese yen is now expected to strengthen against the U.S. dollar while Japanese equities, represented by EWJ, trade at roughly a 32% forward P/E discount to U.S. tech and growth stocks represented by QQQ. This combination puts both currency and valuation dynamics in play for relative performance.

Historically, large valuation gaps of this magnitude have sometimes preceded periods when cheaper markets either re-rate higher or at least hold up better than expensive growth segments. When that has occurred alongside a stronger yen, the relative performance impact for dollar-based investors has often been magnified by FX translation.

In this setup, a stronger yen is a tailwind for unhedged EWJ exposure versus QQQ, as currency gains add to any local equity returns. The pattern is not automatic, but when Japan trades at a clearly quantifiable discount and the yen appreciates, the risk/reward has tended to lean toward Japanese benchmarks rather than high-multiple U.S. growth.

Large Japanese blue chips that anchor EWJ, such as Toyota Motor Corporation (TM), Sony Group Corporation (SONY), Mitsubishi UFJ Financial Group (MUFG) and Nintendo (NTDOY), sit at the intersection of these themes. Their relatively lower multiples compared with U.S. growth peers mean that any shift in global allocations out of expensive tech into undervalued Japan could disproportionately benefit these names.

Past episodes around 2009-2012 and 2016 illustrate that yen strength alone does not guarantee sustained outperformance versus U.S. growth, but the addition of a pronounced valuation discount has been a key differentiator. The current backdrop of an expensive U.S. growth complex versus discounted Japan, combined with expected yen appreciation, recreates the conditions under which Japanese equities have previously shown potential to narrow the performance gap.