There appears - at least based on the views of firms in this article - a sense of continued optimism about prospects for Japan and its equity market into 2026.

The sustained return of inflation and gradual monetary policy normalisation by the Bank of Japan (BoJ) since its 2024 exit from negative interest rates, have been tailwinds for Japanese stocks.

Andrew McCagg, senior client portfolio manager at Tokyo-headquartered Nomura Asset Management, highlighted at a media event in London this month that he is cautiously optimistic about the outlook for the Japanese equities market for the remainder of 2025. Looking forward to 2026, he thinks valuations are attractive.

McCagg emphasised the positive impact of Japan’s corporate governance reforms, and believes that there are opportunities for firms to improve their corporate governance reforms further.

He also emphasised how firms were relieved after a trade framework with the US to impose 15 per cent tariffs on Japan was agreed, as it could have been between 20-25 per cent. “It also reduced the uncertainty. Business sentiment is not so bad, especially for domestic firms,” he added. He is underweight in autos and overweight in IT.

McCagg isn't alone in being positive on Japan and thinking that as a result of corporate governance reforms and other measures, the outlook is quite positive.

Lombard Odier, for instance, also sees further upside for Japanese equities, amid a solid macro backdrop, positive corporate reforms and earnings, and the return of foreign investors; any monetary policy misstep remains a risk to the market, however.

Japanese growth should be positive this year despite a brief setback and some volatility in consumption patterns. Lombard Odier expects the economy to expand by around 1 per cent in both 2025 and 2026. It anticipates that the Bank of Japan (BoJ) will hold off on further rate rises until January 2026, while dollar weakness could be the most important factor supporting the Japanese yen.

Should the market price-in two full additional BoJ hikes, the Swiss private bank thinks this as an opportunity to re-invest in Japanese Government Bonds (JGB) at more compelling valuations. Meanwhile, rising yields and declining hedging costs could spark a wave of capital repatriation, including from US Treasuries, a risk it is monitoring closely, but see little sign of yet. “Rapid changes in the behaviour of Japanese investors, who hold an estimated $3 trillion in foreign assets, could then have profound implications across other markets,” the firm said in a note this month.

Ronald Temple, chief market strategist at New York-headquartered investment manager Lazard, also said markets suggest that the BoJ will increase rates by 46 bps though the 31 July 2026 policy meeting with the first of two rate hikes presumed highly likely by the 23 January 2026 meeting. He sees downside risk to these rate hike expectations, as a wide array of events and data points could cause the BoJ to delay further.

An ageing issue
Meanwhile, Atsushi Matsumoto, senior economist at Nomura AM, drew attention to Japan’s ageing population causing labour force shortages which can be offset by digitalisation.

Top holdings in Nomura’s Japan Strategic Value Fund, which has outperformed the index since its launch, include Japan’s multinational the Sumitomo Mitsui Financial Group as well as Tokyo-headquartered Hitachi, active in digital systems, power and renewable energy. They also include the Sony Group Cooperation, Japan’s telecommunications firm NTT, Japanese homebuilder Daiwa House Industry, Tokyo Electron and Japan’s video game company Nintendo. The fund aims to achieve long-term capital growth through investment in a portfolio of Japanese equity securities.

Ivailo Dikov, head of Japan equities and James Ying, client portfolio manager at Eastspring Investments, are also constructive about Japanese stocks. See more here.