For once, Japan is back in fashion. The Nikkei has surged past record highs, and the mood in Tokyo’s financial district is the most buoyant in a generation.
The election of Sanae Takaichi, the country’s first female prime minister, has injected fresh confidence into markets long accused of complacency. A blend of pro-business rhetoric, structural reform, and a weaker yen has made Japanese equities irresistible to global investors seeking both growth and governance discipline.
Yet valuations remain enticing. Despite the rally, the Association of Investment Companies (AIC) notes that Japanese investment trusts continue to trade at discounts — roughly 9% for the Japan sector and 6% for smaller companies. In a world of stretched multiples elsewhere, Tokyo still offers value. “With rising shareholder returns and a weaker yen, Japan is riding the crest of the wave,” says the AIC. The Japan sector has returned 30% so far this year, nearly double the broader investment trust average.
The “Takaichi trade”
The so-called “Takaichi trade” builds on more than just a change of leadership. Investors see continuity with the reformist zeal of Abenomics, alongside a renewed push for corporate efficiency. Richard Aston of CC Japan Income & Growth Trust argues that the real story lies not in politics but in policy.
The Bank of Japan is slowly normalising monetary conditions, while the Tokyo Stock Exchange continues to pressure companies to improve capital allocation, boost dividends, and unwind opaque cross-shareholdings. “That’s what ultimately underpins Japan’s equity story,” Aston says.
Japan’s corporate landscape is indeed transforming. Activist investors, once shunned, are now partners in reform. Joe Bauernfreund of AVI Japan Opportunity Trust observes that “constructive activism” — collaborative rather than confrontational — has become a defining feature of the market. Companies are returning capital through record buybacks and dividends, balance sheets are leaner, and transparency is improving. While large-cap names dominate the indices, the most fertile hunting grounds may lie among small and mid-cap firms still catching up with governance trends.
The rally’s foundation is not just politics or activism but also the fading of uncertainty. Masaki Taketsume of Schroder Japan Trust points to progress in US-China tariff talks and domestic coalition stability. Together, these factors have eased risk perceptions and given the market room to run. Paul ffolkes Davis of Rising Sun Management, adviser to Nippon Active Value Fund, sees this as “a long-overdue rally” following three lost decades of stagnation. Despite its momentum, he argues, Japan remains “the cheapest developed market in the world.”
Optimists such as Matthew Brett of Baillie Gifford Japan Trust see something deeper at play: a regime shift. Japan, he says, is emerging from deflation into a modestly inflationary era that rewards efficiency and pricing power. Corporate behaviour is adjusting accordingly — firms are shedding excess cash, focusing on core operations, and embracing technology. The result is a dynamic, if uneven, renaissance that has propelled both the Nikkei and the broader TOPIX to fresh heights.
Risks still linger in the Japanese market
Still, risks linger. Valuations now sit near the top of historical ranges, leaving limited room for multiple expansion. Earnings growth must carry the rally forward. The yen, having endured a historic devaluation, remains volatile; too weak, and it risks stoking inflation and eroding household confidence. For all the optimism, Japan’s market remains vulnerable to global interest-rate shifts and domestic political missteps.
Yet for investors with patience, Japan’s appeal is undeniable. Governance reform, corporate activism, and renewed entrepreneurial energy have created fertile ground for long-term value. Companies such as Mitsubishi Electric, Advantest, and Sega Sammy illustrate the breadth of opportunity — from defence technology and semiconductors to digital entertainment and AI.
The Armchair Trader’s view
Japan’s new leader embodies both continuity and change. Takaichi’s rise may be symbolic, but the transformation she presides over is real. After decades of false dawns, Japan’s market revival appears built on sturdier foundations — not speculative euphoria, but structural renewal. For investors who have waited thirty years, the Land of the Rising Sun is finally living up to its name.
AloJapan.com