Japan: Land of the rising stock market

Note: An earlier version of this story misstated Bank of America-Merrill Lynch's price target for the Nikkei 225 stock average. The correct target is 21,700 by the end of March 2016.

The explosive stock rallies in China have gotten a lot of attention this year. Yet there's another Asian market that is also white hot: Japan.

That's right Japan, the world's third-biggest economy that's been growing in fits and starts for more than two decades now.

So why is the Nikkei 225 stock average up nearly 16% this year, vs. less than 2% for the Standard & Poor's 500 Index? The Nikkei hasn't traded at these levels in 15 years. There are two main reasons:

1) Stellar earnings. For starters, while the overall economy is dealing with deflationary pressure, an aging population and a declining workforce, Corporate Japan is flush with cash and on an earnings tear.

Goldman Sachs estimated profit growth of 11% year-on-year in the just-completed earnings season that wrapped up the fiscal year 2014 that ended in March. The investment bank sees another double-digit advance for fiscal 2015.

The weak yen against the dollar and euro has been a big boost to Japanese exporters.

Bank of America-Merrill Lynch equity strategist Kenji Abe has a 21,700 Nikkei target for the end of March 2016, slightly above the current 20,600.

2) Monetary rocket fuel. At the same time, the Bank of Japan has a massive quantitative easing program underway.

Not only has it pushed interest rates to near-zero levels, the Japanese central bank is also buying government bonds, exchange traded funds and even Japanese real estate investment trusts.

That's been a huge lift to stocks and real estate.

How long will the BOJ keep the monetary floodgates open?

Charles Sizemore, a Covestor portfolio manager and founder of Sizemore Capital Management, think investors in Japanese stocks need to be mindful of two things.

First, Japanese stocks aren't cheap by global standards. On top of that, the BOJ's ultra-loose policy is very punishing on the yen and they may lead to currency losses for foreign investors.

"This is very much a play on the Bank of Japan," says Sizemore. "If you believe that its quantitative easing efforts will inflate the Japanese stock market faster than it destroys the value of the yen, you win. If not, you lose."

So what's the takeaway?

Investing in Japan is far easier and generally less risky than punting on Chinese companies, whose accounting standards are sometimes unreliable.

Blue chip multinationals such as Toyota (TM), Sony (SNE) and Nidec (NJ) all have listed ADRs traded in the U.S. and priced in dollars. That's one way to avoid yen currency risk.

There are plenty of exchange-traded-funds focused on Japan to choose from. They include the iShares MSCI Japan ETF (EWJ), the Japan Hedged Equity Fund (DXJ) and the MSCI Japan Hedged Equity Fund (DBJP).

Japan is home to one of the best-performing stock markets of 2015. It may be worth a serious look.

Sanjoy Ghosh is Chief Investment Officer at Covestor (Covestor.com), an online investing marketplace.