Japan’s Equity Market Revival: Momentum with Structural Support
Japan’s stock market has staged a remarkable comeback, returning firmly to investors’ radar after decades of stagnation driven by weak growth and deflation. Over the past 12 months, the Nikkei index has gained 28%, led by technology, semiconductor, and financial stocks. While valuations have rebounded from previously depressed levels, further upside remains supported by earnings growth and improving corporate fundamentals, justifying higher market multiples.
This renewed strength reflects the success of structural reforms aimed at improving corporate efficiency and governance. Historically, Japanese companies held excessive cash balances and cross-shareholdings, which constrained profitability. In response, the Japanese government and the Tokyo Stock Exchange have implemented reforms to enhance transparency, strengthen board independence, and encourage better capital allocation. These measures have been a key driver behind rising equity prices.
A Shift Away from Deflation
Japan’s long-awaited exit from deflation has provided an additional tailwind. The pandemic marked a turning point, helping to break decades of weak consumption and depressed corporate confidence. Policies now aim to channel household savings into equities while nudging companies to deploy idle cash more productively.
Political leadership has also reinforced optimism. Since taking office in October, Prime Minister Sanae Takaichi, a strong proponent of Abenomics, has signalled continued support for expansionary fiscal and monetary policies, which markets view as broadly positive for growth and corporate earnings.
Outlook for 2026: Sustaining the Momentum
Although recent GDP data showed a 1.8% contraction, underlying indicators suggest resilience, with private consumption and investment holding up well. Japan’s domestic demand base remains relatively solid, and the government is preparing a new fiscal stimulus package that could further accelerate growth into 2026.
This stimulus-driven momentum raises the possibility of economic overheating, placing greater responsibility on the Bank of Japan to carefully calibrate monetary policy. The challenge will be to support consumption without allowing inflation to become entrenched or destabilising expectations.
What to Watch
The sustainability of the Nikkei’s rally will hinge on the balance between growth and inflation, as well as how tolerant policymakers are of fluctuations in either. Ultimately, fiscal discipline and monetary credibility will determine currency stability, capital flows, and investor confidence.
In sum, Japan’s equity resurgence is no longer just cyclical—it is increasingly structural, underpinned by reform, reflation, and renewed domestic demand.
Thank you
