Japanese equities have surged this year, with the benchmark Nikkei 225 Index reaching a record high of 48,580.44 on 9 October, as political parties competed for influence ahead of next week’s parliamentary vote.
Speaking at a Fidelity International webinar, investment managers said they expect the rally will continue – so long as the next government continues with measures designed to stimulate economic growth and avoid a return to deflation.
Head of Japanese investments at the firm, Miyuki Kashima, attributed the country’s recent turnaround to a combination of reflation, policy consistency and improving corporate governance.
“Japan’s pivot from deflation to mild inflation represents a defining structural shift in its economic and equity market outlook,” Kashima said.
For her part, she said it would be highly improbable that a new ruling coalition would reverse course after its level of success.
She pointed to Japan’s consumer price index, which averaged above 3 per cent in early 2025 and is now expected to stabilise around 2 per cent by year-end, saying this marks a “sustainable inflation backdrop” that supports real income growth and consumption.
As well as this, she said the Bank of Japan’s cautious policy normalisation is also helping to sustain favourable financial conditions, helping anchor inflation expectations without choking off growth.
Kashima also highlighted the March 2023 Tokyo Stock Exchange (TSE) reforms as a major catalyst. She explained that the TSE’s campaign urging companies trading below book value to focus on cost of capital and stock price triggered a major increase in buybacks, while dividend payout ratios have climbed towards global standards.
“Companies are moving decisively away from cash hoarding towards disciplined capital deployment,” Kashima said.
The transformation was also clear to Forager International’s portfolio manager, Harvey Migotti, and junior analyst Bella Foley, who returned from 10 days in Japan late last month.
Comparing the investment atmosphere in the country with the situation five years ago, Foley said the contrast was “stark.”
“Conference rooms that once sat half empty were overflowing. International investors that ignored Japan for decades were now showing up in force. And the reason is simple: change that has long been promised is finally visible,” she said.
Forager’s allocation to Japan has risen from 5 per cent two years ago to nearly 20 per cent of its International Shares Fund today. This shift, Foley said, reflects both Japan’s improving fundamentals and the lack of relative value elsewhere.
At around 16 times forward earnings and with half of listed companies still below book value, she emphasised that while Japan is increasingly reform-driven, it also remains cheap and under-owned.
Like Kashima, she also pointed to the breakthrough success on the back of the March 2023 TSE mandate.
Adding fuel to Japan’s reform “snowball” – as coined by TSE CEO Hiromi Yamaji – is activism and increased mergers and acquisitions activity, as Foley explained.
Domestic investors are now voting more assertively, while overseas firms have already lodged 157 takeover proposals in the first eight months of 2025 – close to last year’s record. Policy changes now require boards to give “sincere consideration” to credible bids, making Japan an open field for corporate activity for the first time in decades, according to Foley.
Meanwhile, she added that Japan’s much-discussed ageing population is “forcing change”, highlighting the over 2.4 million small to medium enterprise owners over 70, half of which lack successors, causing a wave of consolidation which is reshaping industries.
Simultaneously, she explained that labour shortages are pushing companies to raise wages, in turn driving productivity gains.
Investment opportunities
Breaking down the most promising areas for investment, Min Zeng, Fidelity International portfolio manager, identified opportunities in the financial, construction, industrial and utilities sectors. These sectors, Zeng noted, stand to gain from domestic reflation while remaining relatively protected from tariff risks.
Additionally, he said the banking sector is emerging as one of the “clearest beneficiaries” of the current environment, with stronger net interest margins, rising shareholder returns, and improved governance likely to deliver sustained rerating potential.
He also pointed to construction firms as regaining pricing power, with margins expanding because contractors have regained pricing power.
Meanwhile, Zeng said the digital transformation remains a key structural theme, with defence spending emerging as a significant new one – owing to Japan’s commitment to raise military spending to 2 per cent of gross domestic product.
Looking forward, he said in the near term he expects market leadership to “broaden beyond exporters” as investors price in a more durable phase of domestic reflation under the new administration.
“Over the medium term, I continue to view Japanese equities as well placed to outperform global peers as reform, inflation normalisation and policy stability converge to strengthen earnings visibility and capital efficiency,” he added.
