There appears – at least based on the views of firms in this article – a sense of continued optimism about prospects for Japan and its equity market into 2026.
The sustained return of inflation and gradual monetary policy
normalisation by the Bank of Japan (BoJ) since its 2024 exit from
negative interest rates, have been tailwinds for Japanese stocks.
Andrew McCagg, senior client portfolio manager at
Tokyo-headquartered Nomura Asset
Management, highlighted at a media event in London this month
that he is cautiously optimistic about the outlook for the
Japanese equities market for the remainder of 2025. Looking
forward to 2026, he thinks valuations are attractive.
McCagg emphasised the positive impact of Japan’s corporate
governance reforms, and believes that there are opportunities for
firms to improve their corporate governance reforms further.
He also emphasised how firms were relieved after a trade
framework with the US to impose 15 per cent tariffs on Japan was
agreed, as it could have been between 20-25 per cent. “It also
reduced the uncertainty. Business sentiment is not so bad,
especially for domestic firms,” he added. He is underweight in
autos and overweight in IT.
McCagg isn”t alone in being positive on Japan and thinking
that as a result of corporate governance reforms and other
measures, the outlook is quite positive.
Lombard Odier,
for instance, also sees further upside
for Japanese equities, amid a solid macro backdrop,
positive corporate reforms and earnings, and the return of
foreign investors; any monetary policy misstep remains a risk to
the market, however.
Japanese growth should be positive this year despite a brief
setback and some volatility in consumption patterns. Lombard
Odier expects the economy to expand by around 1 per cent in both
2025 and 2026. It anticipates that the Bank of Japan
(BoJ) will hold off on further rate rises until January
2026, while dollar weakness could be the most important factor
supporting the Japanese yen.
Should the market price-in two full additional BoJ hikes, the
Swiss private bank thinks this as an opportunity to
re-invest in Japanese Government Bonds (JGB) at more compelling
valuations. Meanwhile, rising yields and declining hedging costs
could spark a wave of capital repatriation, including from US
Treasuries, a risk it is monitoring closely, but see little sign
of yet. “Rapid changes in the behaviour of Japanese investors,
who hold an estimated $3 trillion in foreign assets, could then
have profound implications across other markets,” the firm said
in a note this month.
Ronald Temple, chief market strategist at New York-headquartered
investment manager Lazard, also said markets
suggest that the BoJ will increase rates by 46 bps though the 31
July 2026 policy meeting with the first of two rate hikes
presumed highly likely by the 23 January 2026 meeting. He sees
downside risk to these rate hike expectations, as a wide array of
events and data points could cause the BoJ to delay further.
An ageing issue
Meanwhile, Atsushi Matsumoto, senior economist at Nomura AM, drew
attention to Japan’s ageing population causing labour force
shortages which can be offset by digitalisation.
Top holdings in Nomura’s Japan Strategic Value Fund, which has
outperformed the index since its launch, include Japan’s
multinational the Sumitomo Mitsui Financial Group as well as
Tokyo-headquartered Hitachi, active in digital systems, power and
renewable energy. They also include the Sony Group Cooperation,
Japan’s telecommunications firm NTT, Japanese homebuilder Daiwa
House Industry, Tokyo Electron and Japan’s video game company
Nintendo. The fund aims to achieve long-term capital growth
through investment in a portfolio of Japanese equity securities.
Ivailo Dikov, head of Japan equities and James Ying, client
portfolio manager at Eastspring
Investments, are also constructive about Japanese
stocks. See more
here.
AloJapan.com