Japan Equities in 2026: A Guide for International Investors

Japan has re-emerged as one of the most discussed equity markets of the mid-2020s. After three decades of stagnation following the 1989 bubble, a confluence of structural reform, corporate governance pressure, and a changed interest rate environment has prompted a genuine reassessment of the world's third-largest stock market. For HNW investors with international portfolios, Japanese equities now warrant serious consideration — though the risks, particularly around currency, remain material.

The Tokyo Stock Exchange and the Prime Market Reform

The Tokyo Stock Exchange is home to more than 3,800 listed companies across its Prime, Standard, and Growth segments. The Prime Market — equivalent to a main market — lists around 1,800 companies and is the benchmark for institutional investors.

In 2022, the TSE restructured its market tiers and, critically, issued guidance to companies trading below book value (price-to-book ratio below 1.0). Rather than simply listing cheaply on a reformed exchange, companies were told to explain — or remedy — why their equity traded below the value of their net assets. This was a pointed departure from Japan's traditional tolerance of capital inefficiency.

By 2026, the TSE's pressure has produced measurable results. Roughly half of Prime Market companies still trade below book, but the direction of travel is clear: share buybacks have surged, cross-shareholdings (described below) are being unwound, and boards are more attentive to return on equity. The reforms are ongoing, not complete, and that creates opportunity.

Corporate Governance: The Keiretsu Unwind

For much of the post-war period, Japanese companies held stakes in each other — banks owned manufacturers, suppliers held shares in assemblers — through a web of cross-shareholdings known as keiretsu. This arrangement provided stability but destroyed capital efficiency: large pools of equity were locked up in strategic stakes that generated minimal return.

Under sustained TSE and activist pressure, Japanese companies have been unwinding these holdings. Mitsubishi UFJ Financial Group, Sumitomo Mitsui, and other major financial groups have sold billions of dollars in strategic equity stakes. The freed capital is being returned to shareholders or redeployed productively. This is not a short-term trade; it is a structural multi-year process that will continue to release value.

Foreign activist investors — including Elliott Management and ValueAct — have taken positions in Japanese companies and pushed publicly for buybacks, disposals, and governance improvements. The cultural resistance to outside pressure is eroding as Japan seeks international capital.

Buybacks are a useful proxy. In the 12 months to March 2026, Japanese companies announced record share repurchase programmes. Combined with rising dividends, total shareholder returns from Japan are at multi-decade highs.

The Yen: Currency Risk Cannot Be Ignored

The Japanese yen weakened dramatically between 2022 and 2024, reaching historic lows against the US dollar and pound sterling. For a UK investor holding Japanese equities without a currency hedge, a period of significant yen weakness would have offset meaningful equity gains.

The yen's weakness was driven by the Bank of Japan's long-standing ultra-loose monetary policy — negative interest rates and yield curve control — at a time when the Federal Reserve and Bank of England were hiking aggressively. The resulting interest rate differential made the yen a popular funding currency for carry trades.

In March 2024, the BOJ ended its negative interest rate policy — the first rate rise since 2007. Further tightening followed in 2024 and into 2025. As the BOJ normalises policy, the carry trade unwinds partially, providing some support to the yen. However, yen volatility remains elevated, and the structural direction of BOJ policy remains cautious.

For sterling investors, this means:

• Unhedged exposure: captures full equity return in yen, then translated at prevailing GBP/JPY rate. Beneficial if yen strengthens; damaging if it weakens further.
• Hedged exposure: currency hedge adds cost (typically 0.3–0.8% per annum depending on interest rate differential) but removes currency variance. In an environment where JPY rates are rising and converging with GBP rates, hedging costs are declining.

Neither approach is universally superior. Long-term investors who can tolerate currency variance often prefer unhedged exposure; those with specific sterling liability needs may prefer hedged funds.

Bank of Japan Policy Shift: Implications

The BOJ's departure from negative interest rates carries several implications beyond the currency.

The Japanese government bond (JGB) market — one of the largest in the world — had been effectively price-capped by the BOJ's yield curve control. As that policy is wound down, JGB yields are allowed to rise more freely, repricing the bond market and affecting valuations across all asset classes.

Rising domestic rates also benefit Japanese banks and financial stocks directly, which have long suffered compressed net interest margins. The financial sector was a notable beneficiary of the early-2024 rate shift.

The carry trade unwind — whereby global investors had borrowed yen cheaply to invest in higher-yielding assets — is a source of potential volatility. When the yen strengthens sharply (as it briefly did in August 2024), carry trade unwinding can cause broad risk-asset sell-offs. Investors in Japanese equities should be aware that yen movements can create correlated volatility across global portfolios.

The AI and Semiconductor Connection

Japan occupies a strategic position in the global semiconductor supply chain. Companies such as Tokyo Electron, Shin-Etsu Chemical, Sumco, and Lasertec supply critical equipment, wafers, and photomasks that underpin chip manufacturing worldwide. This positions Japan as an indirect beneficiary of AI-driven semiconductor demand, without the valuation premium attached to US chip designers.

Renesas Electronics and Advantest provide further exposure to the AI supply chain at more modest valuations than US equivalents. This is one reason Japan features in many "value plus growth" theses: structural corporate reform, cheap valuations, and genuine AI supply chain exposure.

Topix vs Nikkei 225: Which Index Matters?

The Nikkei 225 is Japan's most widely quoted index — analogous to the Dow Jones in the US — but it is price-weighted and comprised of only 225 stocks. This methodology distorts its behaviour: a few high-priced stocks (such as Fast Retailing, Nikkei's largest constituent) have outsized influence.

The Topix (Tokyo Stock Price Index) is market-capitalisation weighted and covers all Prime Market listed companies — over 1,600 stocks. It is a far better representation of the Japanese equity market. Most institutional investors and serious ETFs benchmark against Topix or MSCI Japan rather than the Nikkei 225.

When comparing performance, ensure you are reading the same index. The Nikkei hit an all-time high above 40,000 in early 2024 for headline purposes; Topix tells a more nuanced story.

Access: ETFs and Active Funds

Passive ETFs (UCITS, London-listed):

• iShares Core MSCI Japan IMI UCITS ETF (SJPA): Total expense ratio 0.12%. Tracks the MSCI Japan IMI index, which includes mid and small caps alongside large caps — broader than pure large-cap indices.
• Xtrackers MSCI Japan UCITS ETF (XDJP): TER 0.09%. Large and mid cap, hedged share classes available.
• Vanguard FTSE Japan UCITS ETF (VJPN): TER 0.15%.

Active managers with a Japan specialism:

• Baillie Gifford Japan Trust (BGFD): Long-running investment trust with a quality-growth philosophy. Has underperformed during value rotations but offers genuine active management.
• Man GLG Japan CoreAlpha: Value-oriented strategy targeting deeply discounted large-cap Japanese companies. One of the most prominent Japan value managers globally.
• Fidelity Japan Trust: Active trust combining quality and value, strong corporate governance engagement track record.

Active managers in Japan may add more value than in highly efficient markets, given the breadth of the universe and the corporate reform dynamics. However, fees of 0.6–1.0% per annum must be justified by consistent alpha over the benchmark.

Valuation and the Investment Thesis

As of early 2026, the MSCI Japan index trades at approximately 14–15× forward earnings — a meaningful discount to the MSCI World (around 18×) and the S&P 500 (around 20×). Price-to-book ratios of 1.3–1.5× are well below the US market's 4–5×.

The bull case for Japan rests on three pillars: (1) corporate governance reform releasing locked-up capital; (2) continued earnings growth as domestic wages and spending recover; (3) the AI semiconductor supply chain exposure at un-stretched valuations.

The bear case is equally clear: the reform process could slow if economic conditions deteriorate; a sharp yen appreciation could hurt exporter earnings; and Japan's demographic decline (shrinking working-age population) constrains long-term growth.

Japan is best approached as a meaningful allocation within a diversified global portfolio — not a speculative bet, but a considered structural position. A 5–10% allocation is typical within global equity mandates.

Risks to Consider

• Currency risk: JPY/GBP volatility remains elevated. Consider whether to hedge.
• Governance pace risk: Reform could slow or reverse under economic or political pressure.
• BOJ policy risk: Missteps in normalisation could destabilise JGB markets and broader risk assets.
• Demographic headwind: Japan's population is declining, which structurally limits domestic demand growth.
• Concentration in export sectors: Japanese equities are heavily weighted to industrials, technology hardware, and autos — all sensitive to global trade conditions.

All investments carry the risk of capital loss. Past performance is not a guide to future returns. Market reforms and governance trends can reverse. Currency movements can significantly alter returns for non-JPY investors. This guide is for information only and does not constitute financial advice. Seek professional advice before making investment decisions.

How Global Investments Can Help

Global Investments provides discretionary and advisory portfolio management services for internationally mobile HNW clients. We can help you assess the appropriate allocation to Japanese equities within your overall global portfolio, evaluate currency hedging strategies, and access institutional-quality active managers and cost-effective UCITS ETFs. Our investment team monitors corporate governance developments at the company and index level. Contact us to discuss your portfolio objectives and how Japan may fit within them.