One look at the chart for the Topix stock market index will tell you that the Japanese opportunity can no longer be described as a secret. As I write, the market is up by 42% over the past year and 67% since the beginning of 2025.
The return of investor interest to a market that had suffered over two ‘lost decades’ has been the result of ongoing corporate reforms in recent years that have made the country markedly more friendly to investors. At first sight, the landslide election victory of prime minister Sanae Takaichi this February seems likely to keep the momentum alive, given her explicitly pro-growth agenda. But are there also new risks to consider in the Land of the Rising Sun?
Japan’s corporate governance reforms were first instigated under former prime minister Shinzo Abe. These encouraged companies to move away from the old habits of cash-hoarding, entrenched cross-shareholdings and balance-sheet conservatism, and towards a more explicit focus on capital efficiency, returns on equity and shareholder value.
The impetus for reform got a significant boost in 2023 when the Tokyo Stock Exchange began pressing listed companies to show that they were using capital efficiently and were taking their market valuations seriously.
In practice, this meant encouraging companies with weak returns, excess cash or depressed share prices to set out credible plans for improving shareholder value. Alongside the Stewardship and Corporate Governance codes, this gave domestic and overseas investors a clearer basis on which to press Japanese companies for more disciplined investment, higher dividends and share buybacks and – in many cases – restructuring.
Takaichi has presented herself as a reform-minded leader who wants to build upon the progress already made with corporate reform and couple it with a broader programme of pro-economic growth initiatives – dubbed ‘Sanaenomics’. She says that her government will aim to sharpen companies’ resource allocation strategies, including shareholder returns, with greater investment in human capital and new ventures. Her aim is to revitalise the Japanese economy while addressing a number of key vulnerabilities such as food and energy security, defence and cost-of-living relief, as well as social security and infrastructure.
Nicholas Weindling, manager of the JPMorgan Japanese Investment Trust (JFJ), argued that Takaichi’s arrival does not interrupt the story of corporate reform, and the wider “normalisation” of the Japanese economy after years of near-zero inflation and interest rates. If anything, it adds a new layer.
“Prime minister Takaichi has a strong policy agenda focused on fiscal spending, AI, shipbuilding, semiconductors and defence”, said Weindling. “The current geopolitical environment, particularly the war in the Middle East, may play into this policy agenda. The war has sent energy prices soaring, which is critical for Japan, a large importer of energy”.
JFJ has exposure to the energy sector via MODEC, an offshore oil and gas production specialist whose shares have risen over 80% in the past year.
Weindling also believes that Japanese defence spending is likely to increase under Takaichi, who favours a strong military in a dangerous neighbourhood. He explained: “A [recent] change in the law will allow Japan to begin to export defence technology. This focus on defence is changing the nature of Japan’s growth and the investment team is finding attractive stocks in industries JFJ had not previously invested in”.
We like how Weindling and his team manage JFJ. There is an unapologetic bias towards companies capable of compounding growth over the long-term, giving investors exposure to dynamic, forward-looking businesses, rather than the stodgier, value-oriented sectors that – while cheap – have too often held Japan back. This leaves the trust well aligned with Takaichi’s reform and growth agenda.
On the flipside, there is the question as to whether Takaichi’s more interventionist fiscal and industrial policy instincts risk complicating the reform agenda, by reviving concerns about debt, inflation and policy discipline.
Firstly, the line between productive investment and politically directed spending can be difficult to maintain. Japan already carries one of the highest public debt burdens in the developed world. When deflation prevailed and interest rates were low or negative, this debt pile wasn’t a problem.
However, higher inflation and bond yields have increased the cost of servicing this debt and so fiscal discipline is much more important than it was. Takaichi has argued for a more flexible approach to fiscal management, but investors may become less forgiving if spending plans appear to rely too heavily on borrowing, subsidies or short-term support for households rather than measures that improve Japan’s growth potential.
A looser fiscal stance could also put renewed pressure on the yen, particularly if markets think government policy poses a risk to the Bank of Japan’s gradual normalisation of interest rates. For exporters, yen weakness can be helpful, but for a country that imports much of its energy, it can also raise input costs and squeeze consumers.
The final question is whether Takaichi’s industrial policy reinforces or dilutes the shareholder-value agenda. Targeted support for strategically important sectors may create clear beneficiaries, and this is where active managers such as JFJ can look for company-specific opportunities. Potentially, if policy starts to favour national champions or politically important industries at the expense of returns on capital, it could pull against the reforms that have made Japan more attractive to overseas investors. However, one would hope that this risk is low, given Takaichi’s reputation as “Japan’s Margaret Thatcher”.
The Japan story therefore remains compelling, but is perhaps just not as straightforward as it was. Takaichi’s agenda will likely reinforce corporate reform and even create new beneficiaries. But if fiscal expansion, yen weakness or political interference begin to undermine previous discipline, investors may need to become more selective.
David Batchelor is a senior analyst at QuotedData. The views expressed above should not be taken as investment advice.