Is There Value?

U.S. investors have several different ways to play Japan using exchange-traded funds.

The WisdomTree DEFA ETF (NYSE: DWM), for instance, uses corporate dividend yields to rank stocks. Japan gets about a 9% weighting. That's less than half its weight in the market-cap-weighted iShares MSCI EAFE Index (NYSE: EFA).

"Japan as a whole has relatively low dividend yields compared to the rest of the world. That said, as Japan grows and companies pay more dividends, they'll get larger weights in the index," said Jeremy Schwartz, WisdomTree's deputy research director.

The PowerShares FTSE RAFI Developed Markets ex-U.S. ETF (AMEX:PDN), meanwhile, takes into account dividends as well as a company's total book value, cash flow and sales, to weight its holdings. It gives Japan almost the same weight as EFA does.

Jason Hsu, Research Affiliate's research director, says he's finding a lot of underlying strength in the country's firms. "You want to get substantial exposure to Japan, regardless of whether you think it's undervalued or overvalued. It's just too important to the global economy," he added. "We'd only venture away from the market when data strongly suggests mispricing over a longer-term period."

Steven Schoenfeld argues that long-term focused U.S. investors shouldn't adjust allocations to Japan based on macro-economic forecasts.

"In this global economy, it's wrong to consider an investment in Japan as simply a play on that country's GDP rate. No matter what its overall growth may or may not be, Japanese companies are producing earnings and creating a significant presence in world markets," said the chief investment officer for global quantitative management at Northern Trust.

And he says that overweighting Japan in a portfolio isn't as big of an issue as shifting allocations in the opposite direction. "I'm not beating my hand on the table arguing that investors need to put more into Japan," Schoenfeld said. "What I'm warning is that people need to be very careful if they choose to underweight it relative to the market."

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