Japan’s stock market rarely tops the list when investors discuss recent standout performers, with most attention falling on US tech stocks and the so-called “magnificent seven.”
The more observant might acknowledge India’s strong run, and more recently the fireworks in Korea, but Japan seldom features in those conversations.
Yet over the past 14 years, Japan has delivered returns that would surprise even seasoned investors who dismissed it as a deflationary demographic disaster.
A £100 investment in the FTSE 100 in the summer of 2012 would be worth around £180 today, a modest if unexciting annualised return over that period.
The same £100 placed in US markets over those 14 years would have grown to £531, a figure that reflects the dominance of American technology companies through the post-financial crisis era.
What is striking, however, is that £100 invested in Tokyo over that identical period would today be worth £532, narrowly edging out the US by the slimmest of margins.
Tom Stevenson, investment director at Fidelity International, describes Japan as the best-performing slice of his pension, “un-flashily delivering the goods year after year.”
The escape from three decades of deflation, during which GDP barely grew, wages stagnated, and companies sat on their cash, is now firmly in the rear-view mirror.
Japan is now benefiting from inflation close to the Bank of Japan’s target, positive wage growth, and improving domestic demand that is feeding through to corporate earnings.
Corporate governance reforms, encouraged by the government and Tokyo Stock Exchange, have been implemented with what Stevenson describes as “surprising alacrity,” reshaping how Japanese companies treat shareholders.
Better governance is showing up in the unwinding of complex cross-shareholdings, more mergers and acquisitions, and notably in growing levels of share buybacks and dividends.
More than two-thirds of Japanese companies are now increasing their payouts to shareholders, a new record that underscores the scale of the cultural shift taking place in boardrooms.
What is newer, and potentially more powerful, is Japan’s exposure to the world’s big capital expenditure themes including artificial intelligence, reindustrialisation, reshoring, automation, and higher defence spending.
Japan has deep experience in factory automation, precision machinery, power equipment, defence electronics, industrial materials, telecom networks and construction, all sectors central to the AI revolution.
Companies including Kawasaki, Mitsubishi, NTT, Keyence, Softbank, and Fanuc sit at the heart of these structural shifts, offering investors broad and diversified exposure to hard-asset economic growth.
The top-performing sectors in Japan so far in 2026 have been metals, electrical appliances, and precision machinery, driven by AI investment via optical fibre for data centres and memory chips.
Machine tool orders are at a record high, fuelled by demand from both the US and China, adding further momentum to what is already a compelling industrial story.
Banks have been the third-best-performing sector, a direct play on domestic reflation and higher interest rates, with another quarter-point increase widely expected in the near term.
Overseas investors have historically allocated less to Japan than its weight in global indexes would suggest, treating it more as a tactical trade than a core long-term holding.
That is changing, as longer-term investors now seek permanent exposure, and domestic savers too are shifting away from bank deposits and government bonds toward equities, with around a fifth of household assets now invested in shares.