Japan’s growth story has not exhausted itself with the surge of the past two years, as a number of experts agreed there is still more to come in 2025 and beyond.
There were some contrasting voices, however, and even optimists like Nicholas Weindling, co-manager of the JPMorgan Japanese investment trust, admitted there are grounds for caution. “A degree of turbulence and market fluctuation” is to be expected, but to him, Japan remains “a compelling opportunity for investors seeking diversification”.
A series of transformative trends, from corporate governance reforms, digitalisation and generational leadership shifts to economic modernisation, are reshaping the nation’s business environment. Combined with structural changes such as re-emerging inflation and a booming tourism sector, this presents “a unique chance” to participate in the next chapter of Japan’s economic transformation.
“Higher prices are becoming entrenched and a labour shortage is driving wage growth, potentially ushering in a new growth cycle. This shift enhances the domestic outlook for companies, making Japan an attractive investment destination,” Weindling said.
“A younger generation of leaders are emerging, who are more open to global perspectives and adopting digital technologies, fostering a culture of innovation and playing a central role in improving corporate governance.”
As an example from his portfolio, the manager mentioned PVC and silicon wafers company Shin Etsu Chemical, which has seen a shift in corporate governance with younger board members increasing dividends and buybacks.
“It's undeniable that Japan’s investment landscape is undergoing a renaissance, driven by a number of intersecting factors. While such significant transformation is likely to come with a degree of turbulence and market fluctuation, the regulatory reforms of the past year will continue to drive corporate governance improvements and the shift to an inflationary environment to drive a positive shift in the Japanese economy,” he said.
“For long-term investors seeking growth and innovation, the Japanese market has a considerable amount to offer as these dynamics continue to develop and unfold in 2025 and beyond.”
Private equity firms in particular have a pivotal role in the evolution of the Japanese market, according to Peter Tasker, co-founder of Arcus Investments.
“Increasingly active in Japan, private firms have capitalised on relatively low valuations and the willingness of underperforming companies to negotiate. These deals not only inject fresh capital but also drive operational improvements and strategic pivots, reshaping Japan’s corporate landscape,” he explained.
“While risks remain, ranging from market volatility to external economic shocks, Japan’s evolving corporate landscape and attractive valuations suggest a positive medium-term outlook. Although Japanese equities are no longer extraordinarily cheap, they remain relatively undervalued compared to global peers, presenting a unique investment opportunity in underappreciated companies poised for recovery or transformation.”
Higher valuations were one of the main reasons why Jacob de Tusch-Lec, co-manager of the £1.5bn Artemis Global Income fund, believes the country’s growth story has become less compelling. He remains overweight Japan, but has been taking profits and reallocating to China, as he told Trustnet last month.
“The Japanese story of corporate reform was one of the most interesting Asia stories two years ago when there wasn’t much of a story in China and when it wasn’t clear what was happening in Taiwan or Korea,” he said. “We’ve made good money in it and now for us, it’s time to look at what the next big thing is.”
Yet for David Mitchinson, manager of the Zennor Japan Equity Income, the corporate governance story in Japan is “very much alive”.
“The past six months have seen share buybacks rise 90% year-on-year and cross shareholdings are being further reduced. This was a feature through the meetings we have had recently with stocks we hold across our portfolios – from Sakai Chemicals to software company Appier to Hibiya Engineering,” he said.
“If companies are doing what they said they are going to do in terms of dividends, buybacks and restructuring operations, then those companies can do well. If you can find companies who are doing the right thing in Japan, you will get rewarded. Japanese stocks are still very cheap, asset rich and overlooked.”
While large-caps have done very well, headwinds might be appearing in the automotive and technology sectors. His attention, therefore, is focused on companies lower down the market scale, which remain under the radar, as around 50% of the market is not covered by analysts.
“There is a lot more potential to add value by working on relatively undiscovered smaller companies. Unlike their large-cap counterparts, they have also not been under the same regulatory pressure (yet) to instigate change, and so the valuation gap has widened. Larger companies are more cyclical and more captive to those global cycles, unlike many smaller companies with a more domestic focus.”
Mitchinson compared Japan’s evolving story to Germany’s corporate governance reforms in the early 1990s – a period of dynamism in the stock market, as conglomerates were dismantled and different entities emerged separately with a greater focus on shareholder value.
“We are just at the beginning – and as the corporate governance story trickles down the market cap scale, opportunities beckon. The change is real. It is happening today. This is going to be a multi-year opportunity as Japan’s markets adjust to what the cost of capital really means.”