Despite the Weakening Yen, Japan's Stock Market Is Outperforming. Here's How to Invest.

The U.S. Treasury recently intervened in currency markets to prop up the Japanese yen, which hit a four-month low against other major world currencies.

The Japanese currency has been weakening against the dollar for years and hit a 40-year low against the greenback in July. That's primarily because the Bank of Japan has kept its benchmark interest rate low for years. Global capital tends to flow to countries with higher interest rates, so currency traders have been selling the yen to buy the dollar, pushing the yen lower.

Yet despite the weakening yen, the Japanese stock market is doing very well this year. That market is up about 19% so far in 2026, as measured by the iShares MSCI Japan Index Fund (NYSEMKT: EWJ). That handily beats the S&P 500 index, which is up about 13% year to date.

Several sectors are driving Japan's market higher this year, including technology, financials, basic materials, and industrials, according to Yardeni Research.

Japan is an exporting powerhouse

And while you might think a weakening currency is a sign of a faltering economy, a weaker yen is actually very good for Japanese exporters like Toyota Motor (NYSE: TM), industrial equipment powerhouse Hitachi, and electronics giant Sony Group (NYSE: SONY). Toyota is the world's largest auto manufacturer; it sold more than 11.3 million vehicles last year out of a total of about 96 billion last year.

Japan's economy expanded at an annualized rate of 2.1% in the first quarter, beating expectations. Exports rose 11.5% year over year, driven primarily by a 29% increase in shipments of semiconductor equipment. Tokyo Electron is one of the world's largest manufacturers of chip-making equipment and a very hot stock to boot.

Japan's economy, with a gross domestic product (GDP) of about $4.4 trillion, is the world's fourth largest, behind only the U.S., China, and Germany.

Image source: Getty Images.

As a result of the weak yen and strong exports and economic growth, I'm very bullish on Japan right now.

There is one major risk facing the country's economy, however: energy. Japan imports about 97% of its oil supply, and about 90% of that comes from the Middle East region. So, supply disruptions and oil price spikes could slow its economy. Japan has increased efforts to source its oil from the U.S., but if the Persian Gulf conflict continues to push oil prices higher, oil will remain more expensive regardless of its source, since it trades on global markets.

That said, I still believe Japanese stocks are worth a look, and the iShares MSCI Japan Index exchange-traded fund (ETF) is a great way to gain exposure to the entire Japanese market.

Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.