Japan has been busily shaking off its uncomfortable reputation for economic decline and financial market blackholes over the past few years. The new leader of the LDP party, Sanae Takaichi, who is likely to become Prime Minister within weeks, has promised to follow in the footsteps of Japan’s economic change-maker Shinzo Abe. Can this drive further gains in the country’s already buoyant stock market?
Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.
Takaichi has promised big spending and even tax cuts, focusing on driving growth over restoring fiscal discipline. There are barriers to this, not least the country’s vast debt burden – currently sitting at around 235% of GDP*. Japanese bond yields have been creeping higher, and the bond markets may put a brake on any spending plans. Also, her coalition partners may push for spending cuts before allowing any major loosening of the purse strings.
Nevertheless, the country’s stock market has warmed to her rhetoric, with the Nikkei hitting new highs on news of her leadership. Japan’s stock market was already on a tear. The Nikkei 225 is up 16.1%, in pounds sterling, for the year to date, and most of those gains have been made in the past three months**.
Some big investors are still backing the Japanese market. It continues to enjoy the endorsement of Warren Buffett, who first invested in 2019, but has recently been topping up his holdings there. He recently raised his Japanese equity stake by around 25% to $23.5bn***. The reason? “We simply looked at their financial records and were amazed at the low prices of their stocks.”
Any boost to Japanese growth under Takaichi will support this trend. The Japanese economy is already showing healthy growth, which has helped support the country’s more domestic companies. The MSCI Japan Small Cap is up 14.9% over one year, versus 14.3% for the MSCI Japan****. This rotation away from the previously dominant export companies, which are also a large part of the Nikkei, may continue if domestic economic growth remains buoyant.
The other major boost for Japan has come in the form of corporate governance improvements. This is now a well-established story in the Japanese market and has also formed part of Buffett’s rationale for investing there. Buffett told Berkshire’s investors “(Japanese companies) repurchase their shares when it is sensible to do so, and their top managers are far less aggressive in their compensation programs than their US counterparts.” In other words, companies are well-managed and executive pay not excessive.
It hasn’t always been that way. Japanese companies used to have a reputation for sclerotic, unimaginative management teams, hoarding vast levels of unproductive cash, and a ‘jobs for life’ culture that stymied innovation. This has changed significantly over the past five years and in many cases, the market has yet to catch up with the magnitude of the change.
Dividends are just one example of this. Carl Vine, manager on the M&G Japan fund, says: “Across MSCI Japan’s current benchmark constituents, dividend-per-share growth has compounded at 11-12% per annum, on average, for a decade. This accelerated into the mid-teens over the past three years and touched nearly 20% growth over the past 12 months. That’s not a narrative, that’s a trend.”
He believes dividends can continue to improve: “There’s plenty of reason to believe that there’s more dividend love to come. Take Toyota as an example. Japan’s largest company, with its newly minted 20% return-on-equity North Star, can, in our view, plausibly be expected to compound dividends per share growth in the mid-teens for several years to come. JR East, as another example, one of the world’s largest passenger railways, looks set to almost double its dividends per share in the coming three years! These are emblematic, not exceptional.”
There is also merger and acquisition activity, which is helping drive markets. In the first half of 2025, corporate deals in Japan totalled US$139.9 billion, representing more than triple the deal value of the same period in 2024, as well as a record high for any first half period^. Companies such as Asahi, the beer company, acquired UK-based Fullers alongside the Fosters brewery business in Australia. Furthermore, Hitachi has been buying up a range of engineering businesses.
This should drive share prices. Companies that were previously a neglected part of a vast conglomerate may now have a new and more engaged owner, while companies that are divesting of non-core assets have more capacity to focus on their strongest business lines.
The change of leadership may also be important in creating a ‘vibe’ shift in Japan. Richard Kaye, manager of the Comgest Growth Japan fund, says: “The focus on administrative reform, growth, defence and population rejuvenation is being renewed. We expect these themes to highlight the strengths of our investee companies, many of which are already transforming how Japan operates – through innovation in retail, energy and workflow efficiency – in addition to supporting the growth of the Asian middle class.”
He adds: “The breadth and depth of the Japanese market make it stand out for global investors looking to diversify beyond the US. While monetary policy uncertainty and election-related risks persist, our work with company management gives us confidence that the businesses they run will continue to deliver above-market returns, even in a global context.”
While there are risks, unambitious valuations make allowances for them. In the meantime, there is a lot to like in the Japanese market, particularly among domestic companies. If Warren Buffett is still interested, it is always worth taking another look.
