Japan’s economy has entered a significant new phase and global investors continue to spend more time in the region. After 30 years, Japan's economy has moved from experiencing deflation to inflation, and from stagnation to a booming economy. Wages are up, businesses are increasing returns on invested capital creating meaningful shareholder value, while Japanese households are shifting money from deposits to investments.

For global investors, the changes have created the most compelling opportunity to invest in Japan in decades, with a structural growth story replacing a long term valuation narrative. While the Japan markets have been admittedly robust, there are still significant areas of uncovered opportunities.

The money behind this trend is meaningful -- in the first half of 2026, overseas investors bought $60 billion more in Japanese stocks than they sold, the most net buying ever over a half-year period. And we think recent volatility in Japan's market has and will create additional opportunities for investors to take advantage of these pullbacks as the key trends driving Japan's growth story remain in place.

Japan's corporate culture shift

A major contributor to the jump in global investor interest is improved corporate governance.

Companies are reassessing capital allocation, with more emphasis placed on increasing returns on invested capital. Management teams are looking at how to increase ROIC by selling non-core assets and unwinding cross-shareholdings, and pursuing strategic growth organically and in cross border strategies. These changes have helped quell investor concerns about companies sitting on too much cash, prioritizing stability over growth, or investing in and holding businesses or assets with less attractive returns.

Another significant change has been the introduction of outside directors to boards. Executives are changing how they run their businesses in ways that benefit shareholders more directly, bringing Japanese companies in-line with global peers.

Japan's government has taken an active role in pushing companies to reassess their governance practices and to focus on enhancing corporate value. Its finalized Guidance for Growth Investment, published in July, now requires Japanese corporates to "create and explain a 'path for growth' based on the business model and enhance profitability by enhancing the value-added of products and services."

For many investors, the idea that companies are working primarily to enhance shareholder value may go without saying.  Japan's corporate culture is now making these goals explicit as part of a government directive, showing the potential impact governance shifts may have for investors in the years ahead.

Households break a decades-long investing habit

A reallocation of cash and deposits into mutual funds and equities by Japanese households has been another key trend driving both domestic and global investor interest in Japan's markets. We believe we are still at the beginning of this allocation shift, and it’s clear that Japan’s government sees it as a priority, too.

Recent initiatives to expand access to tax-advantaged NISA accounts -- Nippon Individual Savings Accounts -- have bolstered investment inflows from Japanese households, which topped 6 trillion yen in the first quarter of 2026, according to Morningstar data, a record for the program. Since the government's changes to the NISA program in January 2024, the number of open accounts increased by about 30%, topping 28 million by the end of 2025.

Just as corporate governance changes brought Japanese corporates closer to parity with their global peers, NISA accounts and programs to expand individual investment using these vehicles makes Japan's financial markets more globally competitive.

Inflation returns after three decades

Another significant structural change in Japan's economy has been the return of inflation.

In 2025, annual inflation topped 3% and for the fourth-straight year inflation exceeded the Bank of Japan's 2% target. Prior to 2022, annual inflation in Japan had not exceeded 2% in 30 years. Inflation offers another push for corporates and households to invest capital rather than hold cash or remain content with middling returns.

The yen has also weakened to multi-decade lows over the last several years, and a weaker yen can bolster the bottom line for Japanese companies as exports become more competitive globally. For global investors, recent volatility in the yen and government interventions in currency markets bears close watching.

Alpha, not beta

With sweeping changes underway after years of stagnation, Japan’s capital markets are once again a growth opportunity. For a long time, we largely saw the dedicated Japan investor buying the Japanese market. Now, there’s new interest from a broader range of investors, like long-only and hedge fund managers, among others.

And though the foundation has strengthened, investors still need to be discerning. We think it is important for global investors to see Japan’s equity markets as offering distinct opportunities rather than a broad canvas. Said another way, we view Japan’s equity markets as a place for alpha, not beta, in portfolios, and global investors remain enthusiastic about the outlook.

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