Maya Funaki, Portfolio Manager, RBC Asian Equity, RBC Global Asset Management (Asia) Limited, summarizes the market in 2025 for the asset class, and gives her thoughts for 2026.
Japan equities surged in 2025, with the MSCI Japan Index surpassing 1989 highs, driven by corporate governance reforms, improving fundamentals, reasonable valuations, and consistent EPS growth.
Political shifts saw Japan’s first female Prime Minister, who’s pro-growth, pro-investment stance was received positively by the market, though navigating high inflation will be a focus in 2026.
Geopolitical tensions with China are viewed as short-lived, counterbalanced by strengthened US ties driving renewal in several industries such as defense and shipbuilding.
Global investors are so far underexposed to the world's third largest economy, and we see strong momentum ahead as investor sentiment continues to intensify for Japan.
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2025 was another strong year for Japan Equities. With the MSCI Japan Index far surpassing its 1989 record, we saw a continuation and acceleration of the themes that helped to drive market turnaround over the last couple of years. Firstly, the success of Tokyo's Corporate Governance Reform helped to maintain investor interest in the region. These, in combination with improving corporate fundamentals, reasonable valuations, and consistent EPS growth, show plenty of room for upside.
That said, Japan has also overcome some hurdles this year. In September, Ishiba resigned as leader of the ruling LDP after the party lost its majority in the upper house in July, but not before securing a 15% tariff-free deal with the Trump administration. Following some weeks of uncertainty, Takaichi won the leadership vote for the LDP, and then became Japan's first female prime minister.
This event was seen positively by the market on the back of her pro-growth, pro-investment stance, similar to her mentor Abe. This approach marks a significant inflection point with Japan's policy outlook, coined Abenomics 2.0, modest expansionary fiscal policy, gentle monetary normalisation, and structural reform. It is worth recognising, though, that Takaichi will have to navigate carefully in the context of multi-decade high inflation. Real wages are also yet to keep pace with this new environment, but we would anticipate these to follow suit in late 2025, early 2026, alongside previously delayed rate hikes.
Some modest market concerns have arisen regarding Takaichi's foreign policy, especially on Japan-China relations, which have already hit some turbulence early into her term. But we know Japan-China tensions have often flared before, with previous negative impacts being short-lived. As a counterbalance to China, Japan seeks to have a strong relationship with the US and other strategic partners, driving renewal in several industries such as defense and shipbuilding.
A relatively weaker yen should also help drive corporate earnings with other regional neighbors, such as South Korea. Having experienced strong growth this year from similar narratives, we see this as a large tailwind for Japan ahead. Global investors remain underexposed to the world's third largest economy, and we see strong momentum ahead as investor sentiment continues to intensify for Japan. Normalised inflation, relatively lower rates, and corporate governance reform enable us to see the market rally continuing in the new year.
Featured speaker:
Maya Funaki, Portfolio Manager, RBC Asian Equity, RBC Global Asset Management (Asia) Limited