Japan has spent much of the past three decades as a cautionary tale for investors, a market on the cusp of recovery that never fully arrived. That picture is changing. A combination of genuine macroeconomic regime change, a reformed corporate governance framework, and a new government with a clear economic agenda has created a set of conditions that we believe merit a positive view on Japanese equities.
Prime Minister Sanae Takaichi won the snap general election on 8 February 2026, securing a mandate for her Liberal Democratic Party following the collapse of the previous governing coalition in October 2025. Her election provides political continuity and a fresh mandate for economic reform.
Her economic programme, known as Sanaenomics, rests on three pillars: greater government involvement in monetary policy, proactive fiscal expansion involving tax cuts and fresh subsidies, and a state-led investment drive in strategic sectors, including artificial intelligence and semiconductors.
This departs in important ways from the Abenomics era of the 2010s. Where Abenomics pursued a deliberately weak yen to stimulate export demand and negative interest rates to stimulate domestic demand, Sanaenomics signals an intention to pursue currency stability and, although to a lesser extent, is willing to accept interest rate normalisation.
One of the most striking things about the Japanese economy today is inflation. Following decades battling deflation, inflation has been above 2% since 2022. As a major importer of energy, Japan was very exposed to the global surge in energy prices following the Russian invasion of Ukraine.
Crucially now, the core drivers of inflation have transitioned to more domestic factors, such as a tight labour market and two consecutive years of inflation-beating wage settlements. This positive real wage growth has enabled companies to pass on higher input costs to consumers while remaining competitive, thereby completing an inflationary cycle that has been absent from Japan for thirty years.
This has enabled the Bank of Japan to respond by abandoning its negative interest rate policy and has resulted in four interest rate rises since early 2024 at a time when other major global economies have been cutting interest rates. With money no longer effectively free and inflation eroding the real value of cash holdings, Japanese companies now face a genuine incentive to invest which marks a behavioural shift with significant implications for equity returns.
The macroeconomic backdrop is being reinforced by a concerted push to reform corporate behaviour. In 2023, the Tokyo Stock Exchange (TSE) took the unusual step of publicly naming every listed company trading below book value. At the time, this amounted to roughly half the companies listed on the exchange. As part of these reforms, the TSE required companies to publish specific, actionable plans to address the valuation discounts with non-compliance resulting in public naming. Since then, the Ministry of Economy, Trade and Industry, the TSE, and the Financial Services Agency have issued successive frameworks and codes to sustain the momentum, creating rare alignment between the exchange, government, and financial regulator around a common aim.
The practical consequences are tangible. Share buybacks within the TOPIX have risen sharply as companies look to return capital to shareholders. Cross-shareholdings, historically used as a defence against hostile takeovers, are being systematically unwound, opening the market to M&A activity and public-to-private transactions at a pace not previously seen.
Japan’s investment case has been discussed before, most prominently during the Abenomics period, without fully delivering. The current situation differs in that inflation is embedded rather than manufactured by policy, wage growth is entering a self-sustaining cycle, and governance reform has unanimous backing. Additionally, our analysis shows that analyst earnings expectations for Japanese equities are seeing upgrades at a rate that stands among the strongest of any major equity region.
Meanwhile, over 50% of Japanese household assets are still held in cash. As inflation continues to erode the purchasing power of those balances, the reformed Nippon Individual Savings Account, redesigned with the UK’s ISA as a model, provides a channel through which household savings may be redirected into Japanese equities.
Taken together, the combination of lower equity market valuations, positive earnings momentum, and a governance reform programme with genuine institutional backing supports a tactical overweight to Japan in our portfolios at this point in the cycle.