Japan equity prices have stabilised following the easing of concerns around tariffs and political developments. Expectations are building for a BOJ rate hike within the next six months, which, when combined with anticipated Fed rate cuts, could enhance the appeal of risk assets outside the US. A weaker dollar would further support international portfolio diversification into Japan, which has so far benefitted from five months of consecutive foreign inflows, with TOPIX hitting an all-time high in September. 

With CPI sticky at 3%, rising labour costs, and 10Y JGB yields holding around 1.5%, inflation appears more entrenched. The BOJ thus has room to continue normalising. Importantly, Japanese corporates are better positioned to absorb higher rates, supported by multi-decade highs in ROE and profitability. A shift away from the BOJ’s earlier dovish stance could be particularly beneficial for financials, especially banks. 

Yen and earnings assumptions. Should the Fed proceed with rate cuts while the BOJ hikes later this year—as currently expected— the USD/JPY could revisit its 2025 low of 140. However, FX should not be a near-term earnings headwind as current average yen levels remain consistent with corporate assumptions (Tankan survey: 147.94 for 2025 and 145.72 for 2026). Barring a sharp yen appreciation—potentially triggered by deeper-than-expected Fed cuts alongside rising risks of a US slowdown— earnings forecasts already incorporate tariff impacts, limiting downside risks. 

Valuation and governance. At 15.3x forward earnings, Japanese equities are trading near Abenomics-era highs, yet today’s stronger ROE reflects more sustained profitability gains. At the same time, governance reform is reshaping corporate behaviour, driving structural changes in business organisation and shareholder returns. Record levels of share buybacks and M&A underscore this shift, while 37% of companies still trade below 1.0x P/B, leaving ample room for further re-rating. Governance reform thus acts as both a catalyst for performance and an anchor of support for valuations. 

Vibrant M&As. Deal activity in Japan has risen steadily since 2020, with a notable increase in large cross-border transactions involving US entities. This trend reflects the combined effects of yen depreciation, accommodative domestic interest rates that support leveraged transactions, and the impact of improving governance, reinforcing Japan’s structural shift toward more efficient capital allocation and higher corporate value. 

Earnings and tariff impact. Consensus earnings forecasts already incorporate tariff risks, limiting further downside. Earnings revisions vary by sector: 

• Upgrades in financials, real estate, and communication services: These domestic sectors are less affected by tariffs and continue to be supported by BOJ rate hike expectations, reflation, and stable domestic demand outlook;
• Stable/minor earnings growth in healthcare and IT: Steady double-digit earnings growth supported by structural drivers including ageing population and digitalisation;
• Downgrades in materials and autos: Impacted by tariffs on steel and autos. Auto companies are generally price-takers, and will take a hit to their earnings to stay competitive.&nbsp

Under these conditions, we maintain conviction in names with robust earnings (domestic demand-related sectors such as IT services, defense, information and communication, and healthcare), as well as beneficiaries of corporate reform initiatives.

Attractive financials. We remain bullish on Japanese banks as we believe they still look undervalued from many angles. The BOJ’s exit from YCC and shift toward policy normalisation should continue to act as a structural re-rating catalyst for the sector. The market is still underestimating the earnings leverage banks enjoy from a steeper front end of the yield curve, improved net interest margins, and stronger loan growth. Moreover, bank valuations remain compelling, with many still trading below book value despite balance sheet improvements, rising shareholder returns, and more efficient capital allocation under governance reform. This combination of policy tailwinds and attractive valuation provides upside for the sector.

Gaming, innovation, and digitalisation. We see opportunities in Japan’s gaming industry, with top contenders breaking sales records within days of product launches, bolstering the ecosystem and software sales outlook, echoing historical hardware-software cycles seen with other gaming consoles. 
Such companies have implemented price increases globally in response to market conditions and new tariffs, underscoring their strong pricing power and stickiness of its ecosystem, providing them with greater flexibility to pass on costs without materially eroding demand. 
Unique to Japan is the also the anime industry, which has evolved into a global growth engine at the intersection of entertainment, technology, and consumer demand. The sector benefits from: 

Global Streaming Demand – Platforms like Netflix, Crunchyroll, and Disney+ are competing aggressively for anime content, driving licensing revenue and global reach. 

• Gaming Synergies – Many top franchises (Pokémon, Dragon Ball, One Piece) seamlessly extend into video games, mobile apps, and merchandising, amplifying revenue streams.
• IP Monetisation – Strong character-driven IP supports long-term cash flows through merchandise, films, and theme parks
• Cross-Border Partnerships – International co-productions and investments (e.g., Sony’s Crunchyroll, collaborations with US studios) broaden access and scale.
• Cultural Soft Power – Anime strengthens Japan’s global cultural influence, attracting inbound tourism and reinforcing the Japan brand. From an equity perspective, these support earnings growth in media, gaming, streaming, and consumer sectors. We are interested to see whether companies like Nintendo, Bandai Namco, Toei Animation, and Sony announce their pipelines at events including the Tokyo Game Show in September and The Game Awards in December. 

Software & IT services: AI as a productivity and growth catalyst. IT investment aimed at improving productivity and competitiveness remains a strategic priority in Japan, and the integration of AI is accelerating this trend. Beyond efficiency, AI adoption is enabling business model shifts. In enterprise IT services, companies are moving from traditional outsourcing toward tailored, AI-driven solutions that enhance client operations and decision-making. In financial IT solutions, AI is being used to improve risk management, fraud detection, and customer engagement platforms. In infrastructure and platform services, AI supports cloud optimisation, cybersecurity, and data analytics, helping clients scale efficiently. Finally, in public and defense-related IT, AI applications in cybersecurity, surveillance, and systems integration are creating new avenues of demand. 

Government initiatives have been instrumental in accelerating the digital transformation in Japan’s software & IT services sector. Programs such as “Society 5.0” (now in its execution stage) and the Digital Agency’s reforms aim to modernise public infrastructure, promote smart cities, and integrate advanced technologies like AI into industry and government services. 

Despite these efforts, Japan has historically lagged global peers in digital investment, constrained by legacy IT systems, conservative corporate cultures, and underinvestment in innovation. However, this gap is now turning into an opportunity, positioning the sector as a key long-term beneficiary of Japan’s digital transformation and governance-driven corporate reform. 

Rising wage pressures and labour shortages are forcing companies to increase IT capex, while governance reform is improving capital allocation toward growth projects, M&A, and shareholder returns. As corporates restructure and adopt AI-enabled solutions at scale, Japan’s digital investment cycle is set to catch up with global peers, laying the foundation for sustained productivity gains and sector outperformance. 

Healthcare: Defensive demand. Japan’s healthcare sector is anchored by the world’s fastest-aging population, with nearly 30% over 65. This ensures steady, defensive demand for pharmaceuticals, medical devices, and long-term-care (LTC) services. Universal coverage and the LTC insurance system further institutionalise spending, creating visibility even during economic downturns. 

Japan has relative strength in medical devices, imaging, robotics, diagnostics, and rehabilitation technologies—areas less exposed to pricing compression than pharmaceuticals. Meanwhile, policy support for regenerative medicine and cell therapies provides a differentiated innovation pathway compared to US or Europe. Partnerships with global biopharma further enhance pipeline opportunities without heavy pricing risk. 

Japanese healthcare and pharmaceutical equities still trade at a discount to global peers, offering defensive earnings stability, structural growth from digital transformation, and M&A-driven upside. For investors, the sweet spot lies in companies with exposure to medical devices, healthcare IT, and elder-care platforms, supplemented by selective biopharma with innovation-driven pipelines.