Does Japan have the most underestimated stock market in the world?

Japanese equities finally seem to be waking up from a long period of hibernation. Japan's economic reforms and generous dividends have not gone unnoticed among investors.

In the late 1980s, the Japanese stock market reached dizzying heights. In those days, speculation was rife. Shares and real estate became so expensive the Imperial Palace in Tokyo was reportedly worth as much as the entire state of California. Back then, 8 of the top 10 of the world’s largest companies were Japanese. The Japanese stock market represented almost 45% of the total global market value, making it larger than the US stock market.

In December 1989, the Nikkei 225 closed at a record high of 38,915 points, 500% of what it had been in at the start of 1980. What followed then was one of the biggest crashes in history. In 1990 the market lost almost 40%, and in the following years Japan slid into a prolonged recession.

This period is known as the lost decades: the 1990s and 2000s were characterised by stagnant growth, falling prices (deflation) and companies paying off debt rather than investing. The economy was stuck in a vicious circle. Investor confidence in Japan Inc. suffered severely. It wasn't until around 2003 that the stock market seemed to bottom out, only to sink even deeper to 7,000 points during the global financial crisis of 2008. While Western stock markets grew steadily for decades, the Nikkei lagged behind.

Back to 1989 levels

Although the index is still trading at around the same level as 36 years ago – a stark contrast to Wall Street, for example – there are signs of life again now. Since 2013, the Japanese stock market clearly seems to be on the rise again. In March 2024, the Nikkei reached its highest level since 1989 for the first time. And in the summer of 2024, the index even hit a record high of 42,000 points, albeit followed by a very volatile period in which the index plummeted to 32,000 points.

Despite the ups and downs, investors have not been afraid to look to Japan again in recent years. The context is different now than in the past: Japan's economic structure has gradually changed and, after decades of disillusionment, there are some cautious signs of hope that would have been unthinkable in the 1990s. In April 2025, foreign institutional investors even bought record levels of Japanese shares.

Economic and political turnaround: goodbye deflation, hello reform

Japan finally seems to be emerging from the shadow of deflation. After almost 30 years of falling or stagnant prices, inflation is back. Since 2022, inflation has been consistently above 2% – a milestone that the Bank of Japan (BoJ) had been aiming for in vain for years. This change is partly due to global factors (more expensive energy and raw materials), but there are also some structural shifts. Years of labour shortages due to an ageing population are finally giving employees more leverage to secure pay rises. Higher wages, combined with expectations of further price increases, could create a positive spiral: consumers are now spending more money rather than saving it or postponing their purchases.

Politically, Japan hasn't stood still either. Since the Abe administration (2012-2020), its governments have implemented structural reforms to revitalise the economy. Under Abenomics, monetary controls were eased (ultra-low interest rates, money creation) and fiscal stimuli were deployed. One notable recent policy intervention is the reform of the Nippon Individual Savings Account (NISA), the tax-free investment account for Japanese citizens. Since 2024, the programme has been made permanent with significantly increased limits to encourage Japanese people to use their huge mountain of savings (more than EUR 6,100 billion in savings deposits, according to Bloomberg) more productively. This is starting to have an effect: enormous sums that had been sitting in savings accounts for years are now finding their way onto the stock market.

Finally, monetary policy has also been cautiously reversed. At the end of 2024, the BoJ finally abandoned negative interest rates when it approved its first interest rate rise in 17 years. The key rate is currently around +0.5% (as at May 2025); this is still extremely low, but does mark the end of an era. Given the fragile growth, further interest rate rises are likely to be slow and limited, but the idea of positive interest rates and an upward yield curve is back.

Japanese business in transition

It is not just just macroeconomics, but also the microeconomics side – businesses themselves – that is in transition. For a long time, profits were not necessarily for shareholders. Companies preferred to hold on to cash rather than increase dividends. External shareholders didn't have much of a say and hostile acquisitions were taboo.

That culture is now changing due to pressure from both the government and investors. A series of reforms is leading to greater transparency and more focus on shareholder value. For example, companies are appointing more independent directors. In 2014, in only 6.4% of companies at least one third of directors were independent. By 2022, this had risen to over 90% according to JP Morgan. In the 2024 financial year, treasury shares worth no less than EUR 100 billion were bought, representing an increase of 75% compared to the previous year. In addition, Japanese companies have been paying record levels of dividends for four years in a row.

An illustrative example is the interest shown by Warren Buffett. In recent years, the renowned investor invested more than USD 23 billion in five large Japanese conglomerates (Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo) because he felt their fundamentals were strong compared to their low stock market prices. Buffett has recently expanded his stake in each of these companies to around 10%. He explicitly stated that he wants to hold these positions “for the very long term”. For many, the fact that the world’s best-known investor bought such a stake is a sign that there is value in the Japanese market.

Sector opportunities: from robotics to the ageing population

Japan has been a technological powerhouse for decades. Some longstanding examples are cars, electronics and machinery, but certain industries really stand out today. The first is robotics and automation. Global leaders such as Fanuc, Keyence and Yaskawa, put Japan in an excellent position to take advantage of the global wave of automation. With wages rising worldwide and supply chains becoming more regional, companies are investing more in automation. Faced with a shrinking workforce, Japan itself also has a huge need for robots and AI to maintain its productivity.

The technology sector in a broader sense also offers opportunities. In addition to hardware, Japan has top performers in video games (Nintendo, Sony), fintech, e-commerce and semiconductor manufacturing equipment (Tokyo Electron, Advantest). Some of these companies are market leaders but are trading at much lower valuations than their US counterparts, partly because their domestic market is smaller and investors have long ignored Japan.

Another theme is the ageing population. Almost 3 out of 10 Japanese are over 65. This means high demand for healthcare, nursing care, pharmaceuticals and entertainment. There is a growing market for companies that manufacture medical equipment (such as Terumo), pharmaceutical companies specialising in age-related diseases, operators of senior citizen facilities and manufacturers of consumer goods for senior citizens. Healthcare robotics is another niche market Japan is focusing on. The silver economy is already tangible in Japan: for example, more incontinence pants for the elderly are sold there than nappies for babies.

Finally, another area to bear in mind for investors is renewable energy and climate technology. As an importer of fossil fuels, Japan has a vested interest in renewable energy. After the Fukushima disaster, the country kept nuclear power on the back burner and invested in offshore wind, hydrogen and solar energy. Large Japanese companies such as Mitsubishi Heavy Industries are developing green technologies, and the government is committed to a low-carbon future. This asset is not exclusive to Japan, but Japan does want to play a significant role in this sector.

The impact of the yen

A unique factor when investing in Japan remains the role of the yen. The yen often serves as a safe haven: it goes up in times of global panic and down in risk-on periods. A stronger yen has positive and negative consequences. On the one hand, it attracts foreign investors because their yen are worth more in their own currency and it reduces import costs, which pushes up the profits of domestic companies. On the other hand, when the yen rises, export-oriented companies will immediately see their earnings fall, resulting in mounting pressure on their competitive position and profit margins. This interaction is a classic Japanese phenomenon: historically, there has been a negative correlation between the yen and the Japanese stock market. When the yen rises sharply, the stock prices of exporting companies go down (and vice versa).

For Belgian investors, this means Japan's currency policy has an important effect on their return. An investment in Japanese shares can yield extra returns if the yen strengthens against the euro, but conversely, a weaker yen can wipe out some of the stock market gains. This currency return can be hedged with specific products, but this comes at a price. Many funds and ETFs offer a hedged version.

How can you get started as an investor?

There are several ways to gain exposure to Japan, each with its own pros and cons:

• Trackers/ETFs: These allow you to buy a whole basket of Japanese shares in one go, usually at a low cost. There are ETFs tracking the broad Topix or Nikkei indices or specific sectors (for example Japanese dividend companies and Japanese small caps). Advantages include their broad spread and simplicity: you follow the market. The disadvantages are that you also include less successful companies and there is no chance of beating the market; you simply get the market average.
• Investment funds (actively managed): Various fund houses offer Japan funds. These fund managers try to beat the market by selecting the best shares. They can also respond to certain themes. The advantages are the expertise and potential extra return ⁠– plus you do not have to do any stock picking yourself. The disadvantages are the higher costs and the fact that there is no guarantee all fund managers will beat the index.
• Individual shares You can also select and buy Japanese shares yourself. This does require in-depth knowledge and follow-up but can be an interesting option if you have specific convictions – for example if you strongly believe in a particular robotics company or car manufacturer.

Before investing, be sure to read up on the main characteristics and risks of financial instruments.

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