European investors have poured $12.3bn into unhedged Japanese equity ETFs so far this year, signalling a striking shift in attitudes towards the yen as demand for exposure to Japan’s stock market accelerates.
The figure represents 82% of the $14.9bn in net inflows recorded by Japan-focused UCITS ETFs during the eight months to the end of August, according to ETFBOOK data reported by ETF Stream. The surge has helped lift assets in Japanese equity ETFs to a record $84.8bn, compared with $51.7bn in January 2025.
Unhedged ETFs now account for almost 87% of assets in the sector, with currency-hedged funds holding just $11.2bn. The trend was particularly pronounced in July, when unhedged products attracted 95% of the month’s $2.6bn in inflows.
BlackRock has been among the biggest beneficiaries. Its iShares range attracted $3.2bn in net new money during the year, with $2.7bn flowing into the unhedged iShares MSCI Japan UCITS ETF. DWS’s Xtrackers MSCI Japan UCITS ETF has also attracted substantial inflows.
The change represents a reversal of the previous preference among international investors for currency-hedged Japanese equity exposure, which allowed them to participate in the country’s stock market without taking on the full impact of fluctuations in the yen. For investors choosing an unhedged ETF, currency movements can make a substantial difference to returns. A strengthening yen boosts the sterling value of Japanese investments, while a weakening yen can erode gains from rising share prices. Currency hedging seeks to reduce this risk, although it comes with additional costs.
The shift comes against a changing economic backdrop in Japan. Corporate governance reforms and pressure on companies to improve shareholder returns have helped attract international capital, while the Bank of Japan’s gradual withdrawal from ultra-loose monetary policy has altered the outlook for the currency.
Our view
David Batchelor, senior analyst at QuotedData, said: “The scale of inflows into Japanese ETFs is impressive, but the overwhelming preference for unhedged products is arguably the more interesting development for the ETF industry. Currency-hedged and unhedged ETFs can offer exposure to essentially the same underlying companies, yet their returns can diverge substantially. The fact that unhedged funds are capturing more than four-fifths of new money illustrates how currency treatment can influence ETF selection, even where the underlying investment strategy is virtually identical”.
