The next phase for Japanese equities
Key takeaways
- Japan’s strong market revival is being driven by improved Japanese corporate performance.
- Japanese and international investors have taken note and are increasing their exposure to the market.
- The market momentum is taking place in an economic environment that has moved from deflation to inflation.
Since April 2025, the Nikkei 225 benchmark equity index has risen by over 40%, and Japan now has one of the best performing stock markets in the world.1
Three key forces are driving this: Corporate reforms; increased international and domestic allocations to Japanese equities; and a macro environment that has normalized, moving from deflation to inflation;
“The momentum in Japan is continuing with the Nikkei 225 and the Topix indices renewing their all-time highs in recent weeks,” said Hiromi Yamaji, Group CEO of Japan Exchange Group at BofA Global Research’s 2025 Japan Conference in Tokyo in September. “The market’s performance has been driven by the robust performance of Japanese businesses and the expectation of further growth of Japanese companies.”
This rally is broad based, across large cap and small cap companies from both the manufacturing and service sectors. It reflects a change in mindset in corporate Japan that now prioritizes profitability, efficiency, and stock market performance.
Corporate Reforms and Actions
Improved capital management is at the core of Japan’s corporate reform agenda, but the recent increase in corporate actions in Japan also reflects its impact. In 2024 there were around 4,700 M&A transactions involving Japanese companies, comprising around 3,700 domestic deals, 660 deals involving Japanese companies buying foreign companies and around 340 deals involving foreign companies buying Japanese companies. All of these were record highs at the time with the trend continuing into 2025 with over 2,700 M&A transactions being completed in the first six months of the year.2
This activity has been driven not only by Japanese companies divesting non-core or non-performing assets but also by the impact of recent corporate reforms that encourage the efficient use of capital to pursue growth. As Japanese firms come under increasing pressure to improve shareholder returns, they are more willing to consider foreign bidders for assets.
Other sign of Japanese corporate activity includes over 100 tender offers having taken place in 2024 and 97 in the first six months of 2025. In 2018 there were only three management buyouts (MBOs), but in 2024 there were 19 and in 2025 there have already been more than 20 such deals announced. Also in 2025, more than 270 carve out deals have been signalled.3
Japanese corporations are also investing in buybacks, being net purchasers of equity on the stock market for over 20 consecutive weeks over the course of the summer in 2025.4
Japanese companies are also at the forefront of the two themes that are propelling some elements of the US market to record highs: automation and AI, either as suppliers, investors, or partners.
Macro Tailwinds
Japan’s corporate activity has been reinvigorated during a period of macroeconomic normalization. Inflation has returned after decades of deflation, with the National Core CPI (Consumer Price Index excluding fresh food) for August 2025 rising 2.7% year-on-year.5
The Bank of Japan (BOJ) has also been raising interest rates, moving away from decades of ultra-accommodative monetary policy. In January 2025 it hiked rates to 0.5%, a 17 year high.
“A tide turn has occurred in Japanese domestic investment and in wages, which had both been sluggish and had caused Japan’s economic stagnation,” Yojiro Hatakeyama, Director-General, Economic and Industrial Policy Bureau, Ministry of Economy, Trade and Industry (METI) said at the same BofA Global Research conference in September.
“I hope all investors can recognize that the tide has turned and that we are now heading for growth.”
Investor Appetite
This performance is more structurally embedded than was the case for other bull markets in the past. One reason for this is the NISA (Nippon Individual Savings Account) scheme, a tax-exempt investment program designed by the Japanese government to encourage individuals to shift their savings from low-interest bank accounts into investments, which was set up in 2014 and revamped last year.6
“NISA has triggered a transformation of the retail investors’ mindset and culture,”
explained Yamaji. “It has especially prompted young people to shift from being savers to investors.” Almost ¥28 trillion ($188 billion) has flowed into the NISA scheme since its expansion in 2024. But this figure only represents some 2.5% of the total amount of money sitting in bank deposits. “In other words, there is still 97.5% to go,” Yamaji pointed out.
One potential headwind to domestic market performance, however, has been the overhang of the BOJ exposure to the stock market through its huge holdings of both exchange traded funds (ETFs), and real estate trusts called J-REITS. Together these are worth ¥75 trillion. The BOJ surprised the market in September by announcing that it intends to reduce its holdings by about ¥620 billion by market value per year.7 While initially this exerted downward pressure on the wider market, at this pace it would still take over one hundred years to dispose of the full portfolio.
Foreign investors have also rediscovered an appetite for Japanese investments. Since April 2025, foreign investors had taken a net purchase position in Japanese stocks for almost 20 consecutive weeks.8 Of these investors, more than half were from the US, with a third from Europe and only 7% from Asia. This growth in US interest is striking, particularly from US high net worth individuals.
The growing demand for Japanese market exposure provides a strong tailwind for market performance. Geopolitical shifts are providing further support as funds are reallocated across the region. Moreover, structural overhangs and macroeconomic headwinds are dissipating.
“Japan is entering a dynamic new phase due to corporate reforms, monetary policy normalization, and geopolitical recalibration,”
said Tamao Sasada, Country Executive for Japan, at the same BofA Global Research conference.
