When Japan’s prime minister Sanae Takaichi declared “Japan is back” during her leadership campaign last year, it sounded very much like standard political bravado.
Yet the Nikkei 225 spent 2025 making good on that promise, with some whipsawing along the way, marking its third consecutive year of positive returns and reaching an all-time high in December.
Japanese equities should therefore appeal to institutional investors, argues one investor.
“Heading into 2026 we are moving beyond the simple weak yen trade and into a phase where Japanese equities are increasingly shielded from the unpredictable impact of US policy,” said Emily Badger, portfolio manager at Man Group.
“With what we believe to be a stable, pro-growth leadership and a corporate governance overhaul that has become a survival imperative for companies, for us, Japan is no longer just a tactical hedge, but a strong domestic play with the potential to continue attracting flows back to the region,” she added.
Other overseas investors have taken notice: net purchases of Japanese cash equities reached roughly ¥5.4trn ($35bn) in 2025, according to data from the Tokyo Stock Exchange.
While that’s a staggering 35 times the volume of the previous year, longer-term inflows remain quite low, particularly compared to the early Abenomics period of the early 2000s.
For Badger, there are three key reasons why she is optimistic about Japan this year.
One is Sanaeconomics and domestic reflation.
“The political backdrop has stabilised under a decidedly pro-growth leader. Since November 2025, financials and real estate have led the market as confidence in the domestic reflation story grew,” she said.
Indeed Takaichi’s ¥17.7trn economic package, part of a broader ¥21.3trn stimulus, provides a backdrop that has already prompted the Bank of Japan (BoJ) to consider raising its economic growth projections during its board meeting next week.
“This domestic story offers a credible alternative for investors if sentiment shifts away from the US and outflows follow,” said Badger.
The second reason Badger categorises as governance as a survival imperative.
“Corporate governance remains the key differentiator for Japanese equities,” she noted. “Reforms are moving from naming and shaming to deep structural change, with companies divesting non-core assets and unwinding cross-shareholdings to boost capital efficiency.”
A further major revision of the Corporate Governance Code is slated for mid-2026, targeting the ‘idle cash’ problem.
“Cross-shareholdings are being dismantled and return on equity is finally trending upward, rising from roughly 8.4% to 9% in the last few years” said Badger. “We now have 80% of prime market companies submitting capital improvement plans. This transformation is a long-term, stock-specific narrative with years left to run.”
The third reason is what Badger considers to be the hope for a virtuous normalisation.
“The BoJ is performing a delicate dance. Governor Kazuo Ueda oversaw a December 2025 rate hike to 0.75%, the highest level since 1995,” she said.
“While he remains cautious about defining a neutral rate, he has expressed confidence that companies will continue to raise wages steadily, noting that uncertainties around US tariffs have receded,” Badger added.
The path forward is one of hopeful normalisation.
“The Shunto spring wage negotiations, which kick off in March 2026 and reach their yamaba peak in mid-March, are expected to maintain strong momentum, with the Japanese Trade Union Confederation (Rengo) seeking hikes of 5% or more,” Badger said.
“Continued BoJ moves should counter the perception of being behind the curve, bolstering the yen and helping to bring down imported inflation,” she noted. “This should support the Japanese consumer and bolster broader domestic confidence.”
She thinks these three pillars have created a stock-specific opportunity set, balancing momentum and value.
Firstly, this could benefit financials, such as banks.
“These benefit directly from rising rates and the potential for a stronger domestic economy to fuel lending,” Badger said. “Many trade around one times price-to-book with decent yields, offering both momentum and value.”
Second are asset managers.
“They sit at the heart of the corporate governance revolution, benefiting directly from increased activity in capital markets,” she said. “As companies restructure, divest non-core assets, and return more cash to shareholders, asset managers act like an infrastructure play on Japan Inc transformation.”
Then there are contrarian opportunities.
“We see the attractiveness in telecoms and retail,” she said. “The sectors are currently unloved, undervalued against historical averages, and positioned to benefit from a reform-driven re-rating as management quality improves.”
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