Japanese stocks are rising, and some small- and mid-cap names could start to share in those gains, some investors say. Corporate governance reforms and weaker ones only initially helped the sector grow and got investors buzzing about the market’s prospects. This week, the Nikkei 225 breached the key 33,000 level — a number investors haven’t seen since July 1990. Separately, the Topix also hit new highs in 2023. .N225 YTD Nikkei 225 mountain this year While the rally mostly dragged down large-cap names, some stocks with small- and mid-caps could begin to catch up to — and even outperform — larger-cap stocks if the enthusiasm continues. The iShares MSCI Japan ETF, which focuses on larger market-cap stocks, is up 16% in 2023. Meanwhile, the iShares MSCI Japan Small-Cap ETF is up more than 7% over the same time period. “I believe that if the company’s corporate governance strengthening trajectory continues and expands into the mid-cap and small-cap space, these groups are likely to outperform their larger-cap peers,” wrote Carlos Asilis, chief investment officer at Glovista Investments. . SCJ YTD mountain iShares MSCI Japan Small-Cap ETF this year What’s more, cyclical stocks are more represented in Japanese small- and mid-cap stocks than among large-cap stocks. That’s the group expected to outperform if fears of a global recession ease. The investor made it clear that small and medium-sized companies are a short-term opportunity for traders. In the long term, Japanese large-cap stocks such as industrials will continue to outperform given the country’s weakening demographic story, he said. Ways to Play One passive investment for investors is the iShares MSCI Japan Small-Cap ETF (SCJ), which tracks a weighted market capitalization benchmark for the country’s small-cap stocks. With just $98 million in assets, it’s a small index that saw only $27.31 million in annual fund flows, according to FactSet data. However, it is relatively cheap with an expense ratio of 0.5%. And this year it is higher by more than 7%. But Glovista’s Asilis said investors might instead prefer to gain exposure to the market by looking for some highly rated mutual funds. One example is Fidelity Japan Smaller Companies (FJSCX). The fund has $379.3 million in total assets under management and has a four-star rating from Morningstar. In March, the fund’s top holding was Renesas Electronics, a maker of chips for automobiles and other industries, with a 3% allocation. However, FJSCX, which has an expense ratio of 0.910%, has been weaker this year. That’s an increase of roughly 13%, while its category is up 16%. Another actively managed fund is Hennessy Japan Small Cap Investor (HJPSX). It manages $111.2 million in assets and is up 9.5% this year. In March, its largest holding was transport equipment manufacturer Musashi Seimitsu Industry with a 2% share. HJPSX has just three stars from Morningstar and an expense ratio of 1.580%.