Amid volatile global stock markets reeling from the news of worryingly low US job growth and 1 August tariffs, world market leadership is undergoing a significant reshuffle.
Emerging as winners, according to senior client portfolio manager at American Century Investments, Bernard Chua, are Japanese equities.
“With the previously dominant ‘Magnificent 7’ and broader US exceptionalism lagging this year, investors are increasingly looking beyond traditional outperformers for growth potential, and after decades of underperformance relative to global peers, Japan is experiencing a meaningful inflection point,” Chua said.
He identified the source of the success as a combination of structural reforms, tech advancements and corporate governance, combining to create new opportunities in a market overlooked since its 1990s deflation.
First, the country is undergoing rapid digitisation. Since FY2021–22, “invest in digital technology” has become the second most popular capital expenditure priority for Japanese companies, according to a Teikoku Databank survey.
Chua explained that Japanese companies are investing heavily in IT infrastructure in a bid to offset rising labour costs and improve productivity.
Second, Chua said Japanese industrial firms in sectors such as advanced machinery, energy infrastructure and AI-driven power demand are well positioned to benefit from global structural trends.
“Companies such as Mitsubishi and Hitachi stand to gain from increasing worldwide investment in electricity generation and next-generation technology,” he said.
And finally, Chua highlighted the evolving corporate culture in Japan, which increasingly prioritises shareholder-friendly policies.
As explained in Lazard’s Global Mid-Year Outlook, these policies began to gain momentum in 2023 after the Tokyo Stock Exchange (TSE) issued a policy called “Action on cost of capital-conscious management and other requests”.
The guideline – with which over 90 per cent of major Japanese companies listed on TSE’s Prime Market complied with by early 2025 – mandated that companies with share prices consistently trading at or below book value devise capital allocation strategies to rectify this.
In addition, in August 2023, new corporate governance rules came into place requiring companies to improve their adherence to international benchmarks when evaluating takeover offers.
Japanese companies were now required to disclose unsolicited bids, maintain transparency in the bid evaluation process and fully consider shareholder interests when assessing an offer.
According to Ronald Temple, Lazard’s chief market strategist, these measures represented “a positive turning point for Japanese companies’ returns on capital and the broader equity market”.
“[And] for investors, the new rules are likely to present opportunities to identify companies with management teams that are focused on improving returns on capital that then lead to improved share price performance,” he said.
Chua agreed, adding that the policies are already seeing positive results, with investors seeing accelerated stock buybacks, higher dividend payouts and improved board diversity.
After years of sparse allocation, American Century Investments has already been increasing its exposure to Japanese equities.
"We believe the market offers a compelling risk-reward balance for investors seeking diversification beyond traditional US and tech-heavy exposures."
