Japan: A rising sun for equities?

Japanese equities have historically underperformed relative to their global peers, as a cocktail of subdued domestic demand, persistent deflation, yen volatility, and poor corporate capital efficiency capped earnings growth.    

However, several long-standing headwinds are beginning to reverse. Stronger wage growth now supports rising domestic demand, while corporate governance reforms and strategic exposure to AI-related investment suggest that fundamentals are beginning to align.  

These factors provide a stronger foundation for a more constructive view of Japanese equities, given their support for the potential for more durable earnings growth compared with other more volatile Asian indexes.   

While global equity performance is increasingly driven by the AI investment cycle, Japan’s exposure differs from that of other AI beneficiaries in that it spans multiple stages of the AI value chain rather than being concentrated in a single segment.  

US returns have largely been driven by hyperscalers and semiconductor designers, while Taiwan and Korea benefit from their positions at the forefront of semiconductor foundry and memory manufacturing, respectively. As such, AI-driven performance in these markets is largely concentrated in a few select names.  

Meanwhile, Japanese names offer a different form of exposure, underscored by participation across multiple segments of the AI value chain, rather than domination in just one. This includes industries such as semiconductor manufacturing equipment, testing and inspection, semiconductor materials, and automation.

Japan’s broader participation provides a more diversified exposure to AI-related capital expenditure, reducing concentration risk while maintaining AI-driven upside potential. 

Until just two years ago, the Bank of Japan (BoJ) faced an uphill battle against deflation, which persisted for decades despite numerous efforts by the Japanese government to stimulate household demand.  

More recent figures show underlying inflation rising gradually, signaling that price pressures are now being supported more by domestic demand than by price shocks.

Nonetheless, more upbeat activity is palpable as real wages remain in positive territory while businesses surveyed in the BoJ’s Tankan, a quarterly survey, continue to express rosier outlooks.  

The BoJ has already said that further normalization will require wage growth to support demand-driven inflation. So far this year, those conditions have largely been met. While monetary tightening is typically a headwind for equities, the BoJ's pursuit of policy normalization reflects improving macroeconomic fundamentals, fueled by positive business sentiment and stronger domestic demand.  

Corporate governance reforms have long been a structural tailwind for Japanese equities. Although reforms have been underway for more than a decade, the recent emphasis on capital efficiency and shareholder returns should continue to support both earnings growth and equity valuations.  

The Tokyo Stock Exchange (TSE) and the Financial Services Agency finalized revisions to its corporate governance code this month. The revisions effectively shifted the focus toward execution, reflecting a greater emphasis on portfolio optimization and the productive deployment of excess cash.  

Through the TSE’s existing capital efficiency initiative, the revisions further strengthen incentives for companies to improve profitability, increase shareholder returns, and create value from underutilized capital. 

Although the stage was set over a longer period, Japanese equities appear poised for robust yet steady growth. More supportive macroeconomic conditions, corporate governance reforms, and broader exposure to AI investment provide avenues for earnings growth.  

While risks such as yen appreciation, geopolitical tensions, and renewed tariff threats persist, stronger fundamentals reinforce a constructive view of Japanese equities.

Nonetheless, the diversified set of return drivers strengthens the case for maintaining strategic exposure to Japanese equities as part of a regional portfolio.

Related Article: Metro$ Japan Equity Feeder Fund 

YOSHITAKA HIRAKAWA is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. He holds a Bachelor’s in Management Engineering from Ateneo de Manila University. With a background in data-driven decision-making and quantitative methods, he aims to provide meaningful insights. Hungry for adventure, he constantly seeks new sights, sounds, and experiences, from cliff jumping to trying new cuisines.