Annual flows into BlackRock’s Japan ETF were almost three times the flows in the previous year and the asset manager believes the Japanese stockmarket still has further upside.
As tariff uncertainty and concerns about a potential AI bubble dampened enthusiasm for US equities last year, investors renewed their focus on Asian markets, with Japan emerging as a particular standout.
In 2025, Japanese stocks beat the S&P 500, returning 22.7 per cent in US dollar terms compared with 15.8 per cent for the US index, according to Goldman Sachs. Markets particularly gathered pace late in the year, with the Topix 100 Index breaching 3,000 points in August and the Nikkei 225 closing above 50,000.
Australian investor inflows last year reflected the trend, with the iShares MSCI Japan ETF (IJP) pulling in over $340 million for the year – nearly three times its 2024 inflows.
The asset manager said the ETF provides access to sectors that may be under-represented in local investor portfolios with a 25 per cent weighting to industrials and 17 per cent weighting to consumer discretionary.
This would be complementary to Australian equity exposures where the ASX is dominated by financials and materials.
With the Bank of Japan potentially resuming rate hikes in 2026, it said exposure via unhedged ETFs could also benefit investors if the yen appreciates alongside rising interest rates.
According to a client survey by the firm in late 2025, 40 per cent of respondents said they intend to increase their exposure to share markets in the Asia Pacific region more generally heading into Q1 2026.
Writing in a recent note, BlackRock said it remains positive on Japan’s equity outlook for the year ahead, with shareholder reforms and the new prime minister’s fiscal measures expected to sustain momentum.
It dubbed the rise in investor optimism seen in 2025 as the “Takaichi trade”, referencing the election of Sanae Takaichi as Japan’s prime minister in October. Her dovish monetary leanings and plans to support growth through tax cuts and subsidies were seen as key drivers.
It followed the ongoing themes of reflation, policy consistency, and improving corporate governance for the country highlighted last year by Fidelity’s head of Japanese investments, Miyuki Kashima.
Questions remain
While viewing Takaichi’s plans as promising, BlackRock noted the key question is whether she can deliver – particularly as her Liberal Democratic Party must negotiate with independents and coalition partners, including the Japan Innovation Party.
So far, it argued, the parties’ alignment of interest on economic stimulus seems to be holding. The Japanese Cabinet approved the largest stimulus package since the pandemic in November last year, worth US$135 billion.
“While bond markets reacted negatively to the expanding government debt, we expect the spending package to support domestic demand into the new year, with more policy stimulus likely,” stated the firm.
Despite this, it added that the impact on inflation presents another risk to Takaichi’s policy stance, with November 2025 figures indicating a 3 per cent increase in consumer prices, ahead of the Bank of Japan’s 2 per cent target rate.
While the CPI has eased from nearly 4 per cent earlier in 2025, BlackRock noted that the central bank has resumed raising interest rates, likely proceeding cautiously and data-dependently, with one more hike expected in Q3.
Meanwhile, in line with Bank of Japan (BoJ) Governor Kazuo Ueda’s comments that inflation must be sustained by domestic wage growth to justify further hikes, Japanese unions plan to push for significant pay raises this year.
Commenting on the Tokyo Stock Exchange reforms that have boosted investor interest in recent years, BlackRock added that the changes will enter a new phase in 2026, with companies failing to improve earnings growth and capital efficiency facing potential delisting.
The Japanese Financial Services Agency will also revise its corporate governance code this year, focusing on effective capital allocation and better use of cash for investment.
With these modernising reforms driving shareholder distributions to more than triple over the past decade, BlackRock argued that the “chronically undervalued” Japanese equity market could see a sustained re-rating.
