The Japanese equity market is entering a new era and consolidating its appeal. At ¥22.320 billion, or €120 billion, share buybacks reached a record level in 2025. A powerful signal of Japanese corporates’ commitment to supporting the market and rewarding shareholders, this record highlights the impact of the structural reforms initiated by the Tokyo Stock Exchange in 2022.
Fresh impetus for equity markets
The current momentum in Japanese equities is aimed at accelerating the modernisation of the country’s economy by encouraging companies to evolve their governance practices, optimise their cash holdings and significantly reduce cross-shareholdings, a legacy of the keiretsu (Japanese conglomerates), thereby improving capital allocation.
In addition to share buybacks, Japanese companies have raised dividend payout ratios, which have historically been low. They are also signalling a greater willingness to pursue more ambitious investment policies. In the final quarter of 2025, capital expenditure reached a new record of ¥15.400 billion (€83 billion), up 6.5% year-on-year (Reuters, 3 May 2026). Another positive signal is that this investment has been concentrated on growth sectors such as AI-related infrastructure, energy security and defence. However, this investment potential is still far from exhausted. These sectors are in fact among the strategic priorities of the new government led by Sanae Takaichi. The Prime Minister, elected in October 2025, secured a decisive victory in the February 2026 parliamentary elections, likely ushering in a period of political stability, a relatively rare occurrence in Japan.
Markets supported by retail and foreign investors
Japanese equity markets reflect this new era. Despite significant volatility linked both to the international geopolitical environment and changes in domestic interest rates, the broader Tokyo Stock Price Index (TOPIX) has gained 14% year-to-date, while the Nikkei 225 has surged by 27%. This has helped sustain investor interest, both domestic and international. Daily trading volumes on the Tokyo Stock Exchange’s main market have accordingly doubled over the past year (Asia.nikkei.com, 26 May 2026).
Highly exposed to foreign markets, particularly the US, Japanese retail investors are once again turning their attention to their domestic market. Just like businesses, households have tended to favour savings over investment in recent decades. However, the return of inflation is encouraging greater diversification, particularly into equities and their potential returns. Foreign investors are another key source of support for Japanese equities: after having long shunned the market, they have been net buyers since the start of the year.
Diversified investment themes
While Asian equity markets as a whole have benefited from enthusiasm around AI-related stocks, the Japanese market also offers complementary investment themes. A significant part of its recent momentum lies in Japan’s positioning within the AI value chain, with companies such as memory leader Kioxia, semiconductor manufacturing equipment producer Tokyo Electron, and test and measurement specialist Advantest. Japan also boasts global leaders across sectors including robotics (Fanuc and Keyence), defence (Mitsubishi Heavy Industries), energy security (Hitachi) and consumer goods (Fast Retailing and Asics). These segments have delivered strong performances in recent months.
With the impact of the Bank of Japan’s interest rate normalisation now largely priced in, solid corporate fundamentals and ongoing governance reforms continue to support the long-term re-rating potential of Japanese equities. Driven by a recovery in investment, improved capital allocation, exposure to attractive structural themes and growing interest from both domestic and international investors, Japanese equities are increasingly deserving of a more prominent role in global allocation strategies.
Disclaimers: These data and opinions of LFDE, as well as the sectors and securities mentioned, are provided for information purposes only and do not constitute an offer to buy or sell a security, investment advice or financial analysis. Past performance is not an indication of future performance.
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