Why are Japanese equities looking better positioned for a re-rating?
Japan’s equity market is evolving beyond its deflationary past. Head of Japanese Equities Junichi Inoue believes investors may find diversification and growth potential in a market still trading below historical averages.
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Key takeaways:
- Japan’s return to inflation and real wage growth is enabling stronger consumer spending and corporate earnings, laying the foundation for sustainable economic momentum.
- Rising foreign ownership is driving meaningful changes in corporate governance as Japanese companies strive to align more closely with global investor expectations.
- Japanese equities offer diversification, providing exposure to domestic and foreign revenues. The asset class is now looking more appealing than ever with the removal of tariffs and political uncertainty.
1Ministry of Health Labour and Welfare of Japan, Ministry of Internal Affairs and Communications of Japan, Sphynx Investment Research, as at 30 July 2025.
2 Japan Exchange Group, Japan Securities Dealers Association, JP Morgan, Janus Henderson Investors as at 26 June 2025.
3 FactSet, Janus Henderson analysis; MSCI Japan Index geographic revenue exposures as at 30 September 2025.
4 Forbes.com; Trump Announces Japan Trade Deal With Lowered Tariffs Of 15%—U.S. Futures And Japanese Auto Stocks Rise; 23 July 2025.
Images sourced from Getty Images and licensed for use.
The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 180 constituents, the index covers approximately 85% of the free float-adjusted market capitalisation in Japan.
Inflation: The rate at which the prices of goods and services are rising in an economy. The consumer price index (CPI) and retail price index (RPI) are two common measures; the opposite of deflation.
Deflation: A decrease in the price of goods and services across the economy, usually indicating that the economy is weakening. It differs from ‘disinflation’, which implies a decrease in the level of inflation. Deflation is the opposite of inflation.
Tariffs: A tax or duty imposed by a government on goods imported from other countries.
Valuation: An estimation of the current worth of an asset based on future performance and current financial data.
How important is the return of inflation for Japan?
In Japan we are seeing around 3% inflation during the past three years or so, but the policy rate has been kept at 0.5%. With real interest rates still negative, Japan is some way from a neutral rate of perhaps 1% to 1.5%. The return of positive real wage growth has significant implications for the economy and companies. Japan had real wage growth of about 4% this year.1 When consumers feel more comfortable to spend, companies are able to raise prices, which leads to stronger revenue feeding into corporate earnings. This is meaningful change for both consumers and businesses after almost three decades of deflation. And as a result, we are now seeing profit growth much higher than revenue growth, something that we have not seen previously.
What’s the most underappreciated factor driving Japanese equities’ long-term growth?
Apart from mild inflation and positive real wage growth, I believe investors are underappreciating the continuing improvement in corporate governance and shareholder value. Company ownership used to be about 40% financial institutions, and only around 5% foreign investors. Now the tables have turned, foreign ownership is now more than 30%,2 so companies now have to pay more attention to this group of shareholders. They are not just listening, but also taking action, in particular, calls for corporate change, and to improve shareholder total returns.
What’s the key benefit of having exposure to the Japanese market?
Japan is a cheaper way to gain exposure to global growth. Looking at the MSCI Japan Index, about 50% of revenue generation is from abroad, and 50% is domestic.3 For investors who are overexposed to US stocks, investing in local Japanese businesses offers diversification and growth potential, with many opportunities independent of what may happen in the global economy.
What’s in store for investors for the remainder of 2025?
While tariff uncertainty and geopolitics led to a turbulent first half of the year for markets globally, the US tariff agreement in July where the US dropped tariffs on Japanese goods from 25% to 15% removed a lot of uncertainty for investors.4 More recently, a key development has been the election of Sanae Takaichi as LDP leader, an ally of former PM Shinzo Abe, who via ‘Abenomics’ advocated stimulus and reforms. Takaichi is expected to be elected at the parliament as Japan’s first female prime minister, with markets welcoming the news given it could bring much-needed stability and predictability politically, and for the economy. Takaichi’s reflationary and expansionary policies could mean the pace of of rate hikes is going to be slower. But overall, we believe Takaichi’s leadership and support for mild demand-pull inflation could catalyse a re-rating of Japanese equities, which are still trading on attractive valuations versus history.
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4 minute watch
Key takeaways:
- Japan’s return to inflation and real wage growth is enabling stronger consumer spending and corporate earnings, laying the foundation for sustainable economic momentum.
- Rising foreign ownership is driving meaningful changes in corporate governance as Japanese companies strive to align more closely with global investor expectations.
- Japanese equities offer diversification, providing exposure to domestic and foreign revenues. The asset class is now looking more appealing than ever with the removal of tariffs and political uncertainty.