Japan, the Land of the Still Rising Stock Market?

Japan, the Land of the Still Rising Stock Market?

The combination of steady macro conditions, improved governance, and industrial renewal supports the case for sustained outperformance relative to many other developed markets. 

Japanese equity markets posted strong returns in 2025, staging a rally that not only surpassed but sustained gains above the previous all-time high reached in 1989. Underpinning the rally was decent earnings, improving sentiment, and confidence in a durable shift toward reflation. While the year was politically eventful, with Sanae Takaichi becoming Japan’s first female prime minister, the more important story lies in the structural reforms and economic realignment already underway. The outlook for 2026 and beyond hinges on Japan’s ability to sustain this momentum through coordinated progress on reform, restructuring, reflation, and reshoring.

The change in leadership has provided political clarity after months of uncertainty, but the focus of policy is squarely economic. Prime Minister Takaichi, who has the strong support of the people, has outlined a pro-growth agenda emphasizing higher wages, productivity, and domestic investment. Her coalition’s priorities include streamlining regulation, supporting innovation, and modernizing labor markets as it seeks to translate corporate profitability into sustained household income growth. In a society long accustomed to deflationary stagnation, this political push for true structural change is very positive.

The 4R’s of Japan’s Equity Market Resurgence

Reform is central to the new policy framework. Corporate governance remains a key area. Initiatives from the Tokyo Stock Exchange to improve capital efficiency are being reinforced by broader policy support and investor pressure on companies with substantial cash to use that cash to make investments, pay dividends, or buyback stock. Pension funds and asset managers are increasingly voting against boards that resist reform, creating tangible accountability. Labor-market flexibility is also widening, with new policies encouraging mid-career mobility, female participation, and digital-skills training. These measures aim to unlock productivity and raise Japan’s long-term growth.

Restructuring is continuing at both corporate and sector levels. The government’s emphasis on mergers, acquisitions, and foreign partnerships has accelerated consolidation in manufacturing, retail, and logistics. Foreign investors encouraged by favorable valuations are participating in record numbers of takeovers and minority stakes. Domestic firms, under shareholder pressure, are unwinding cross-holdings and exiting unprofitable divisions. Together, these changes are improving return on equity and signaling a healthier corporate ecosystem.

Reflation, elusive for decades seems to be finally taking root. Robust wage growth due to strong spring labor-union settlements has started to moderate but remains well above levels seen in the prior decade. Policymakers now aim for “good inflation,” where sustainable and stable wage growth out paces the rate of inflation and can therefore encourage consumption.

Meanwhile, reshoring and industrial policy have emerged as strategic imperatives. Japan is rebuilding domestic capacity in semiconductors, batteries, and advanced materials to reduce dependence on external supply chains. The government’s multi-year subsidy program for green and digital industries—worth more than ¥2 trillion—has drawn significant private-sector investment. Rising geopolitical risk has strengthened the argument for “strategic redundancy,” encouraging firms to repatriate high-value production and automate operations. Reshoring also aligns with broader efforts to revive regional economies outside Tokyo and Osaka by channeling new industrial projects into local prefectures.

The U.S.–Japan relationship remains constructive, with shared priorities including critical minerals cooperation, higher defense spending, expanded bilateral trade, and a joint commitment to strengthen supply-chain resilience. The yen is a potential point of alignment between Trump and Takaichi, as both would prefer to see it strengthen. The currency has fallen more than 40% against the US dollar since the start of the pandemic, reaching historically weak levels. While yen depreciation has boosted export earnings and attracted foreign investment, it has also imported inflation and worsened Japan’s cost-of-living crisis. Roughly 70% of Japan’s inflation stems from food prices, as the country imports about one-third of its food. With Japan’s aging and shrinking agricultural workforce, there is little domestic capacity to offset these pressures. We expect the yen to appreciate into 2026 due to Japan’s improving economic fundamentals, though authorities are likely to manage currency movements to help maintain corporate competitiveness.

Domestic and external dynamics intersect with broader demographic reform. Japan’s shrinking workforce has long constrained growth, but policy responses are becoming more pragmatic. The new Population Decline Countermeasures Headquarters is prioritizing childcare support, immigration reform, and labor-market modernization. Efforts to digitalize public services and healthcare aim to raise efficiency even as the population ages. While demographic headwinds will persist, these initiatives could mitigate their economic drag and create new opportunities in automation, robotics, and healthcare technology. 

From an investment perspective, the convergence of reform, restructuring, reflation, and reshoring presents a compelling structural story. The expectations in corporate earnings growth look to be troughing due to a reduction in tariff uncertainties and capital discipline, and shareholder returns through dividends and buybacks are at record highs. Foreign participation is growing, but domestic investors, long cautious, are also buying equities as inflation makes cash less attractive. The combination of steady macro conditions, improved governance, and industrial renewal supports the case for sustained outperformance relative to other developed markets.

Risks remain. Global demand could soften if the U.S. or China slows sharply, and energy costs remain a wildcard given Japan’s reliance on imports.  However, Takaichi intends to restart nuclear power plants with eleven already in the process of seeking the necessary approvals. Politically, the durability of reforms will hinge on Prime Minister Takaichi’s ability to sustain strong party unity and public support as social security reforms proceed, and defense spending rises to 2% of GDP.

In sum, Japan enters 2026 with renewed economic vitality and policy coherence not seen in decades. In our view, the alignment of corporate reform, steady reflation, and strategic reshoring is reshaping the country’s growth model and giving investors reason to view Japan not as a laggard, but as a source of durable, high-quality returns.