'The current momentum in Japanese equity markets aims to accelerate the modernization of the country's economy by encouraging companies to evolve their governance models and optimize cash reserves, while urging them to significantly reduce cross-shareholdings : a legacy of the keiretsu conglomerates : and thus adapt their capital allocation,' explains Kevin Net, Head of Asia and Portfolio Manager at La Financiere de l'Echiquier.

Beyond these share buyback programs, Japanese firms have revised upward their traditionally low dividend payout ratios. They are also demonstrating a commitment to more ambitious investment policies. In the fourth quarter of 2025, capital expenditure reached a new record of 15,400bn JPY (€83bn), up 6.5% year-on-year, according to Reuters.

In another favorable signal, companies have focused on high-growth sectors such as AI-related infrastructure, energy security, and defense. Furthermore, this investment potential is far from exhausted. These sectors are among the strategic development priorities of Sanae Takaichi's new government. The Prime Minister, elected in October 2025, won a decisive victory in the February 2026 legislative elections, likely ushering in a period of political stability, a relatively rare phenomenon in Japan.

Markets Driven by Retail and Foreign Investors

Japanese equity markets reflect this new era. Despite significant volatility linked to both the international geopolitical context and interest rate trends in Japan, the broad Tokyo Stock Exchange index, the Topix, has risen 14% since the beginning of the year, while the Nikkei 225 has soared 27%. This has sustained interest from both Japanese and foreign investors. Consequently, daily trading volume on the Tokyo Stock Exchange's Prime Market has doubled in one year (source: Asia.nikkei.com).

'Highly exposed to foreign markets, particularly in the U.S., Japanese retail investors are showing renewed interest in their domestic market. Much like corporations, households have tended to prioritize savings over recent decades. However, the return of inflation is encouraging diversification, particularly toward equity markets and their yield prospects. Foreign investors constitute another major support factor for equity markets. After long neglecting this market, they have been net buyers since the start of the year,' notes Kevin Net.

Diversified Investment Themes

According to the analyst, 'while Asian markets as a whole have benefited from the enthusiasm surrounding AI-related stocks, the Japanese market also offers other complementary investment themes. A significant portion of the recent growth in this dynamic lies in the AI value chain, where the country is well-positioned with companies such as flash memory leader Kioxia, Tokyo Electron in semiconductor manufacturing equipment, and Advantest in semiconductor testing and validation.'

Japan can also rely on several global leaders in sectors such as robotics, with companies like Fanuc and Keyence, defense with Mitsubishi Heavy Industries, energy security with players like Hitachi, and consumer goods (Fast Retailing, Asics). These segments have recorded strong stock market performances in recent months.

'While the effects of interest rate hikes by the Bank of Japan now seem largely priced in, solid corporate fundamentals and governance reforms support the long-term revaluation potential of Japanese equities. Driven by the return of investment, improved capital utilization, positioning in promising investment themes, and growing interest from domestic and foreign investors, Japanese equity markets are rightfully regaining their place in international allocation strategies,' observes Kevin Net.