As investors seek growth opportunities beyond the US, Japan stands out thanks to its resilient economy and supportive domestic factors. While US and global equities rebounded in May following April's sharp, tariff-driven decline, volatility persists as new trade policies remain under discussion. In this uncertain environment, Japan presents a compelling opportunity, underpinned by a strong domestic economy that is largely insulated from daily tariff headlines.
Despite the market turbulence in the first half of 2025, Japan’s equity market has remained relatively steady. The MSCI Japan Index returned 7.7% in the six months to May, compared to just 0.56% for the S&P 500 Index and 3.59% for the S&P Global 100 Index.
This may help explain why Australian investors are increasingly turning to Japanese equities. The iShares MSCI Japan ETF (IJP) has attracted over $112 million year to date – placing it among our top 10 most popular ETFs of 2025 by inflows.
Inflows to the iShares MSCI Japan ETF (IJP)
Source: BlackRock data as of 23 May 2025
To put this in perspective, IJP saw $114 million in inflows over the entire 2024 calendar year. With 2025 inflows already at 98% of that figure, it’s clear that Japan has gained favour among Australian investors amid a more challenging return environment.
What’s driving Japan’s Momentum?
An economy in recovery
After years of sluggish growth, deflation, and negative interest rates, Japan appears to have turned a structural corner. Consistent wage and price growth—fueled by a tight labour market and an ageing population—are driving the strongest nominal GDP growth since the 1980s (see chart below).
Japan’s nominal GDP since the 1980s
Source: Japan Cabinet Office and Morgan Stanley Research February 2025. Note e = research estimates
According to Japan’s Ministry of Labour, Health and Welfare, scheduled cash earnings for university graduates rose 5% in 2024, compared to just 1% in 2014. This highlights how in-demand younger workers are now helping to drive wage growth.
At the same time, corporate reforms are delivering more of the economic recovery’s benefits to shareholders. Since 2023, enhanced listing criteria on the Tokyo Stock Exchange have encouraged companies to return excess cash via record-level buybacks. We’ve also seen underperforming companies de-list or divest non-core business lines, sharpening the focus on earnings growth and capital efficiency.
Cash-rich consumers and investors
Japan’s economic momentum is also being supported by domestic consumers and investors. Japanese households hold around US$14 trillion in assets—about 50% of which is in cash. This is significantly higher than in markets like the US or EU, where a greater share of assets is held in equities or pension plans (see chart below).
Composition of household financial assets
Source: Financial Times/Japan Securities Dealer Association, as of 31 December 2024
These large cash reserves are not only fuelling consumption but may also support future equity market inflows. The Nippon Individual Savings Account (NISA) program, launched in early 2024, offers tax incentives for shifting cash into equities or managed funds. As a result, net flows into Japanese managed funds doubled year-on-year in 2024.
While the impact of US trade policy—particularly the proposed 25% tariff on automotive imports—remains uncertain, markets appear to have priced in much of the downside. Analyst and company earnings revisions suggest that sentiment could improve as trade negotiations progress and a potential middle ground is reached.
How to tap into Japan’s growth story
Japanese equities can offer a valuable diversification opportunity, allowing investors to benefit from Japan’s long-term recovery and currency movements.
The MSCI Japan Index has a more balanced sector composition than other major indices—for example, its largest sector weighting is 24%, compared to 34% for the S&P/ASX 200 and 32% for the S&P 500. This may help reduce concentration risk for investors taking index exposure to Japan.
Currency exposure is also worth considering. With Japanese interest rates expected to rise later this year as the Bank of Japan addresses inflation, the yen could strengthen—especially during periods of market stress. For this reason, unhedged Japanese equity exposure may be preferable at this time.
For those looking to participate in Japan’s long-term growth, the iShares MSCI Japan ETF (IJP) offers access to around 85% of Japan’s total stock market capitalisation. It can serve as a core building block in global equity portfolios, while also offering potential currency appreciation benefits through unhedged exposure.
Once tariff-related volatility subsides, we believe Japan’s wage and inflation growth—combined with ample domestic savings—will continue to provide a strong tailwind for equities. With broad-based opportunities emerging from the ongoing trade realignment, Japan remains firmly on the fast track.
