CIO Insights: Japan – still rising

20 November 2025

10 minute read

Japan has quietly been one of this year’s standout equity markets. The TOPIX Index, the country’s broad market benchmark, has reached all-time highs, with year-to-date gains of 22% in both USD and yen terms at the time of writing – among the strongest performance in major global markets. Behind the rally is a mix of “reflation”, clearer policy direction, corporate reforms, and record buybacks that are helping the country move past decades of deflationary stagnation.

In this month’s CIO Insights, we break down the four forces we see driving Japan’s resurgence and what they could mean for the country’s outlook ahead.

Key takeaways

First force: Reflation is here to stay. After its “lost decades” of low growth and deflation, Japan’s economy is finally regaining momentum. Prices are rising, wage growth is the strongest in decades, and nominal growth has broken out of a long-standing holding pattern.
Second force: Twin policy tailwinds from monetary and fiscal settings are supporting the economy. As a result of this reflation, the Bank of Japan (BOJ) has begun to raise interest rates, but remains very accommodative. At the same time, fiscal policy under newly elected Prime Minister Sanae Takaichi is set to turn more expansionary, with higher spending on defense, AI, and energy. Together, these factors are helping Japan’s economy and markets sustain their momentum.
Third force: Japan Inc.’s transformation is underway via corporate reforms and AI investment. Shifts in corporate governance practices are pushing Japanese companies to focus more on profitability and how effectively they use their resources. More companies are using share buybacks and higher dividends to lift valuations, showing steady progress toward better governance and shareholder focus. At the same time, structural technological shifts – led by AI – are also helping to reinvigorate Japan’s industrial base and stimulate new areas of growth.
Fourth force: Equity market dynamics are improving through buybacks and domestic flows. Corporate reforms are translating into record levels of share buybacks. The pace has remained strong this year, helping to support valuations and improve overall market dynamics. Meanwhile, equity inflows through the revamped Nippon Individual Savings Account (NISA) program are gradually building a domestic investor base, adding another steady source of demand for Japanese equities.
The four forces above support a positive view on Japan’s market, but yen depreciation can dampen returns for foreign investors. Our Economic Regime Asset Allocation (ERAA) framework remains overweight on Japanese equities, reflecting the forces described above. For foreign investors, a weaker yen (given expansionary fiscal policy under a Takaichi-led government) and a still-cautious BOJ can affect returns. In this environment, a currency-hedged exposure can help investors manage depreciation risk while staying invested in Japan’s equity opportunity.

(See our Glossary at the end of the article for descriptions of terms used.)

1. Japan’s reflation is here to stay

Japan has battled deflation and sluggish growth since the 1990s – a period known as its “lost decades”. The backdrop today looks very different as the economy enters a reflationary phase that it hasn’t seen in decades.

As with much of the rest of the world, Japan saw a structural economic shift in the period following the pandemic. This period of reflation began with a series of global shocks that pushed up import prices, including higher energy and commodity costs and a weaker yen. For the first time in decades, Japanese companies began raising prices – and eventually wages as well – marking a significant shift from the decades prior.

This moved Japan into a more positive environment for nominal growth, which has broken out from years of stagnation, as shown in Chart 1. That matters for markets because stronger nominal economic growth translates to better prospects for corporate earnings.

2. Twin policy tailwinds from the BOJ and “Sanaenomics”

Economic policy is also helping with momentum. On the monetary side, the Bank of Japan has begun raising interest rates in response to firmer inflation, with the policy rate now at 0.5%. The key point, however, is that the BOJ remains accommodative. Even with these increases, real interest rates remain deeply negative – currently at -2.4%. With borrowing costs still well below the rate of inflation, companies and individuals are encouraged to borrow, and hopefully, invest and spend more.

Fiscal policy plans under the newly elected Prime Minister Sanae Takaichi are adding further momentum. Her “Sanaenomics” agenda points toward a more expansionary stance – rooted in Abenomics and consistent with the broader global shift toward higher fiscal spending (as we noted in our 2025 outlook: “FAT” is the new normal). Her government is already expected to unveil a stimulus package of roughly 17 trillion yen (US$110 billion)1, or 2-3% of GDP, in the coming weeks. Beyond this, she has signalled targeted spending on AI, semiconductors, energy security, infrastructure, and defense.

Markets responded positively to her election, with investors viewing the policy direction as broadly supportive of Japan’s longer-term growth prospects, though it does imply higher government debt over time. Combined with the tailwinds from reflation and ongoing corporate reforms (more on this below), the move toward more stimulative fiscal policy is contributing to a constructive outlook for earnings, particularly in sectors aligned with Takaichi’s priorities.

3. Japan Inc.’s transformation via corporate reforms and AI

These policy shifts sit alongside two important forces shaping Japan’s corporate landscape: 1) ongoing improvements in corporate governance and 2) rapid advancements in AI and digital infrastructure.

Corporate governance improvements are supporting better returns

As we first flagged in our 2024 outlook, reforms to corporate governance have been making steady progress since they were introduced under late Prime Minister Shinzo Abe. They’ve since been reinforced by an initiative from the Tokyo Stock Exchange (TSE) in 2023 to “name and shame” underperforming firms2 – in a bid to improve profitability and capital efficiency (or more effective usage of their resources).

These changes are starting to show up in market data: Chart 2 illustrates how Japanese equities’ return and valuation metrics have improved since the TSE implemented its campaign – which aimed to bring companies’ price-to-book (P/B) ratio above 1x and return on equity (ROE) above 8%.

Still, the opportunity remains sizable. According to the TSE’s September update3, around 40% of its largest companies and roughly 60% of its smaller and mid-cap companies still trade at P/B ratios below 1x and have ROE below 8%, underscoring how much room there is for further progress. In short, these reforms remain a structural tailwind for Japan’s corporate fundamentals and long-term valuation potential.

Meanwhile, Japan is also benefiting from a wave of investment tied to AI and digital infrastructure. The country already has a well-developed industrial sector, and long-standing demographic pressures – such as an aging population and chronic labour shortages – have pushed companies to invest in automation and productivity-enhancing technologies for many years. Capital spending has been rising steadily, growing at an annual rate of around 6-7% in recent years, bolstered by these challenges and supported by stronger corporate profitability.

These domestic trends now intersect with global tailwinds from AI. Japan plays an important role in the AI value chain through semiconductors, components, and precision machinery used in AI hardware. For example, firms like Tokyo Electron, ROHM, and Murata play critical roles in global supply chains, supporting the production of high-performance sensors, power semiconductors, and automation solutions for AI hardware. Meanwhile, Japan Inc is also investing heavily outside of Japan – SoftBank, for instance, is investing $30 billion in OpenAI4, underscoring Japan Inc.’s international push into the sector.

Investment in AI infrastructure in Japan is also ramping up. Global hyperscalers have announced roughly ¥4 trillion (US$28 billion) in planned data-centre investments in Japan5, and industry forecasts point to 12-14% annual growth in AI-related data-centre capacity. This supports demand for power systems, connectivity components, and specialised hardware – again, areas in which many Japanese manufacturers already have strong expertise.

Taken together, these trends suggest that AI is becoming a meaningful source of support for Japan’s industrial sector and its longer-term earnings outlook.

Japan’s equity market structure – essentially the balance between the supply of shares and the demand for them – is also improving as buybacks rise and domestic participation grows.

On the supply side, corporate governance reforms have motivated companies to buy back more of their own shares. These repurchases reduce the number of outstanding shares, which lifts earnings per share, returns capital to investors, and helps support valuations.

As shown in Chart 3, buybacks reached a record ¥20 trillion (US$130 billion) in 2024, equal to around 2% of the market’s total value and comparable to buyback activity in the US, where this force is also a key driver of market performance. Momentum has remained strong this year, with analysts expecting another record level of repurchases.

On the demand side, domestic inflows through the revamped Nippon Individual Savings Account (NISA) investment program are helping broaden Japan’s household investor base. Cumulative investments have already exceeded ¥59 trillion, surpassing the government’s 2027 target. That said, most of this money has been directed toward global and foreign equity funds. Of the ¥5.5 trillion (USD$35.5 billion) in NISA-eligible equity inflows recorded in the first half of this year, we estimate that only about ¥400 billion, or about 7%, went into Japanese equities directly or indirectly through global funds.

While small relative to the scale of ¥20 trillion in buybacks, NISA does provide a consistent channel for long-term household participation, even if the near-term impact on domestic equities still appears limited.

A consideration for overseas investors: the yen

For overseas investors, the main risk to watch is the yen, especially relative to the US dollar. Several forces – both at home and abroad – could keep the currency under pressure:

The dollar could rebound after a tumultuous 2025: As we noted in our 2025 mid-year outlook, the dollar’s valuation is now closer to neutral. And with the Fed restarting its rate-cutting cycle while recession risks remain low, there is a possibility that the US economy could “run hot” in the first half of 2026 – particularly given the additional fiscal support from the One Big Beautiful Bill (OBBB) and as the administration prepares for mid-term elections in November. This combination could put upward pressure on the dollar and widen US-Japan interest-rate differentials again.
Further yen depreciation could benefit the domestic economy: As shared above, “Sanaenomics” points toward more expansionary fiscal policy, while the BOJ is normalising monetary policy only gradually. It’s also worth noting that the yen has long been a key tool in Japan’s reflation strategy since the Abenomics era. And although the BOJ intervened in 2024 to slow an excessively sharp depreciation when USD/JPY breached 160, it has not pushed back against more recent moves. Together, these factors could keep the yen under pressure in the near term.

This matters because currency moves can meaningfully affect investor returns, even though yen weakness is often supportive for Japanese companies. A softer yen boosts the yen value of overseas earnings, supports export revenues, and tends to improve profit margins for many of Japan’s industrial, consumer, and technology exporters whose costs are largely domestic.

As Chart 4 illustrates, periods of yen depreciation have tended to coincide with stronger equity performance. The reverse is also true: a stronger yen can create a headwind for earnings and near-term market returns.

Japan’s equity outlook remains positive, but keep an eye on currency

Together, these forces underpin our positive outlook for Japanese equities. Our Economic Regime Asset Allocation (ERAA) investment framework remains overweight on the asset class, supported by the combination of 1) steady reflation, 2) policy tailwinds, 3) corporate transformation and 4) an improving market structure that supports Japan’s longer-term equity story.

For overseas investors who hold Japanese equities in USD, currency exposure remains an important consideration. While Japan’s macro backdrop continues to support equities, the risk of further yen depreciation – and its effect on USD-based returns – is still relevant. A currency-hedged approach can help investors stay invested in Japan while reducing sensitivity to currency moves. For investors who stay unhedged, the long-term case remains the same, but currency moves could have a noticeable impact on performance in the period ahead.

As always, we’ll keep a close eye on Japan’s policy landscape, earnings trends, and currency dynamics, and keep you updated as conditions evolve.

Authors

Stephanie Leung, Chief Investment Officer

Stephanie and her team oversee the full spectrum of investment products and portfolios offered at StashAway. She brings more than two decades of investment expertise across multiple asset classes. Prior to joining StashAway in 2020, she managed investment portfolios at institutions such as Goldman Sachs and multi-billion dollar family offices in the region.

Justin Jimenez, Head of Macro and Investment Research

Justin has more than a decade of experience in economic and investment research, and contributes to shaping the investment office's views on the global economy and asset classes. Prior to joining StashAway in 2022, he was an economist at Bloomberg.

Glossary

Japan Inc.

A collective term for Japanese corporations and the country's business sector as a whole.

Abenomics

The policy framework introduced by former Prime Minister Shinzo Abe. Combined aggressive monetary easing, fiscal stimulus, and structural reforms to fight deflation and revive growth.

Deflation

When prices fall over time, the opposite of inflation. Can trap economies as consumers delay purchases expecting lower prices, demand slows, and wages stagnate.

Real interest rate

Interest rates adjusted for inflation. Calculated by subtracting the inflation rate from the nominal interest rate. If the policy rate is 3% and inflation is 2%, the real rate is 1%.

Capital efficiency

How well a company uses its resources to generate profits. Measured through metrics like return on equity (ROE) and return on assets (ROA).

Share buybacks

When a company purchases its own shares from the market. This reduces the number of shares outstanding, returns cash to shareholders, and increases earnings per share.

References

Reuters. (2025). Japan considering stimulus package sized around 17 trln yen, Nikkei says. Retrieved from: https://www.reuters.com/world/asia-pacific/japan-considering-stimulus-package-sized-around-17-trln-yen-nikkei-says-2025-11-14/
Japan Exchange Group. (2025). Action to Implement Management that is Conscious of Cost of Capital and Stock Price (Prime and Standard Markets). Retrieved from: https://www.jpx.co.jp/english/equities/follow-up/02.html
Tokyo Stock Exchange. (2025). Status Update and Future Initiatives Regarding "Action to Implement Management That is Conscious of Cost of Capital and Stock Price". Retrieved from: https://www.jpx.co.jp/english/equities/follow-up/b5b4pj000004yqcc-att/sjcobq0000024jxu.pdf
SoftBank Group Corp. (2025). Q2 FY2025 Earnings Results Investor Briefing. Retrieved from: https://group.softbank/media/Project/sbg/sbg/pdf/ir/presentations/2025/investor-presentation_q2fy2025_01_en.pdf
Wood Mackenzie. (2025). Japan's data centre boom to drive 60% of power demand growth as US$28 billion hyperscaler investment reshapes grid. Retrieved from: https://www.woodmac.com/press-releases/japan-data-centers-power-demand/