No one ever knows what is going to happen in any market. The best we can hope to do is accurately measure where the relative strength is—and then try to stay with it. Presented without much comment is an article from Business Insider dating back to December 2010, just over two years ago. Here’s the headline:
After 20 Years Of Misery, Here’s Why Japanese Stocks Are Ready To Soar
And here is a chart of the Japan ETF versus the S&P 500 over the last two years:
Source: Yahoo! Finance (click to image to enlarge)
As you can see, Japan is down more than 10%—and 25% in relative terms—despite its supposedly compelling valuation. In fact, it could be completely correct that Japan is incredibly undervalued. Certainly the CFA who wrote the article is more qualified than me to make a judgement. It may also be true that eventually this spread will go to other way, due to the difference in valuation—but even two years has not been enough to prove out this thesis so far.
So far it’s just been an expensive lesson in learning that markets can do whatever they want for as long as they want. The only way for a forecast to come true is for the price to move in the forecasted direction—and that means relative strength will shift too. Rather than guessing what will happen, we can trust relative strength to adjust if things change.
The 10% drop in EWJ since Jan 2011 is mostly because of the drop in the Yen compared to USD. The MSCI Japan index (which EWJ tracks) is mostly flat over this period. Of course, the S&P500 still comes out better and so your point about forecasting is still valid, not to mention very important (I believe).
More on the currency effect on country ETFs: the MSCI Japan index is up 21.5% since Nov 2012. But EWJ is up only 8.2% - the rest of the return has been eaten up by the rise in USD/JPY.