Japan’s new prime minister offers “hope and continuity”
Investment trust managers explain why they are optimistic about Japan.
It’s been an exciting time to be investing in Japan. Japanese stocks have surged to record highs after pro-business politician Sanae Takaichi was elected as the country’s first female prime minister.
Even so, the Japan and Japanese Smaller Companies sectors are trading at discounts of 9% and 6% respectively. With equities rallying, it could be time to consider investing in Japanese investment trusts.
With rising shareholder returns and a weaker yen, Japan is riding the crest of the wave. Japanese investment trusts are also benefitting from this momentum. The Japan sector has returned 30% this year, compared to 17% for the average investment trust.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC)
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “With rising shareholder returns and a weaker yen, Japan is riding the crest of the wave. Japanese investment trusts are also benefitting from this momentum. The Japan sector has returned 30% this year, compared to 17% for the average investment trust.”
How has the new prime minister influenced your outlook for Japanese equities?
Richard Aston, Manager of CC Japan Income & Growth Trust, said: “Recent political developments in Japan had inevitably created some short-term uncertainty for markets and currencies. Investors are now digesting what Sanae Takaichi’s leadership of the country will mean in practice, particularly given the complex coalition dynamics she will need to navigate.
“However, from a medium-to-long-term equity perspective, the direction of travel remains intact. The Bank of Japan is likely to continue normalising policy as it addresses inflation, and, most crucially, the corporate governance reform agenda is expected to remain a key focus.
“The drive, led by the Japan Exchange Group, to make companies more efficient with their capital, improve shareholder returns through dividends and buybacks, and unwind cross-shareholdings will persist. That’s what ultimately underpins Japan’s equity story, and it remains the key focus for us as investors.”
Matthew Brett, Manager of Baillie Gifford Japan Trust, said: “As long-term, bottom-up investors, our job is to sift through the relentless news flow – separating fact from fiction and signal from noise. Japan’s latest leadership change offers both hope and continuity, and perhaps a brief pause in the two-year turnstile of Japan’s revolving-door prime ministers.
“That said, we welcome the spotlight that the so-called ‘Takaichi trade’ has cast on Japan, rekindling echoes of Abenomics. But we would urge investors to look beyond fiscal activism and government stimulus, toward the more durable engines of corporate growth – structural tailwinds in AI, automation, and healthcare provision that are gathering pace. It is these fundamental trends that give us genuine excitement for Japan’s future.”
What are the key drivers behind Japan’s recent market performance?
Paul ffolkes Davis, Chairman of Rising Sun Management, investment advisor to Nippon Active Value Fund, said: “The current strength of the Japanese markets is merely the continuation of a long-overdue rally that has now been underway for approaching two years.
“PM Takaichi’s recent election has provided additional fuel because of what are perceived as her stock friendly policies. Nippon Active Value Fund has argued since inception that the Japanese market is the cheapest in the developed world – notwithstanding the present rally, and after 30 years of going nowhere, it still is.”
Masaki Taketsume, Manager of Schroder Japan Trust, said: “The rally has primarily been driven by a number of receding uncertainties. These include signs of progress in US-China tariff talks, easing concerns in US credit markets and, domestically, the LDP’s coalition agreement with the Japan Innovation Party. Collectively these have lowered political risk and culminated in the election of Ms Takaichi as prime minister.”
Joe Bauernfreund, Manager of AVI Japan Opportunity Trust, said: “One of the most defining features of Japan’s equity renaissance has been the rise of constructive activism. Unlike the more confrontational models often seen in Western markets, Japan’s brand of engagement has been grounded in collaboration and long-term alignment. Investors have increasingly worked alongside management teams to improve capital allocation discipline, streamline operations, and embrace higher governance standards.
“This shift has driven meaningful change. Companies are returning excess capital through dividends and buybacks at record levels, balance sheets are being optimised, and transparency has improved across the board. While much of this progress is reflected in the large-cap segment – as evidenced by remarkable runs in the broad-based Nikkei and TOPIX indices – we continue to believe that the most compelling opportunities remain in Japan’s small and mid-cap space.”
Nicholas Weindling, Manager of JPMorgan Japanese Investment Trust, said: “Japanese equities have hit an all-time high over recent months, lifted by expectations of US rate cuts, robust earnings and solid GDP growth. The TOPIX is up about 7% in dollar terms year to date. This rally has been underpinned by a sweeping wave of corporate governance reforms across Japan, aimed at boosting capital efficiency and shareholder value, and this can be seen by record high share buybacks and ongoing unwinding of cross shareholdings.
“With the encouragement of the government, regulators, and shareholders, Japanese companies are now adopting ever higher standards of independence and transparency which have been welcomed by investors. Companies are focusing on enhancing balance sheet restructuring and efficiency, and we are seeing many others repositioning by focusing on their core businesses.”
Matthew Brett, Manager of Baillie Gifford Japan Trust, said: “While some attribute Japan’s rally to fiscal stimulus or renewed optimism around global trade, we believe it reflects something far more fundamental – a regime shift. Japan is finally emerging from its deflationary past into a more balanced, inflationary future. This structural reset is awakening long-dormant pricing power, reshaping corporate behaviour, punishing inefficiency, and fuelling record share buybacks that are underpinning earnings-per-share growth.
“Add to that a wave of companies defying expectations – from SoftBank’s successful AI bets to SBI’s fintech disruption, and Japan’s globally ascendant gaming champions – and you have the makings of a genuine market renaissance.”
One of the most defining features of Japan’s equity renaissance has been the rise of constructive activism. Unlike the more confrontational models often seen in Western markets, Japan’s brand of engagement has been grounded in collaboration and long-term alignment.
Joe Bauernfreund, Manager of AVI Japan Opportunity Trust.
What are the risks facing Japanese equities right now?
Masaki Taketsume, Manager of Schroder Japan Trust, said: “Valuations now sit at the upper end of historical ranges, implying limited multiple expansion in the near term. Going forward, the pace of earnings recovery will be a key to the rally’s durability. Excessive yen depreciation risks fuelling inflation, which could undermine the government’s approval rating. The new cabinet’s immediate economic measures are also likely to focus primarily on consumer support. Accordingly, we are avoiding excessive exposure to exporters despite the weaker yen.”
Joe Bauernfreund, Manager of AVI Japan Opportunity Trust, said: “Following its historic devaluation over the past three years, the yen remains structurally cheap. That said, given tariff turmoil, a potential monetary expansionist at the helm coupled with a dubious dollar, the yen’s path from here is anyone’s guess.
“None of this materially impacts our outlook. Intuitively, a weak yen is negative for our small-to-mid cap, domestically focused strategy, which is underweight in the big exporters and cyclical names.
“Japan’s march through 50,000 on the Nikkei symbolises more than a market milestone – it’s an affirmation that reform, engagement, and patient capital can drive genuine transformation. For active investors, particularly those focused on under-researched small and mid-cap names, Japan remains one of the most fertile grounds in the world for uncovering long-term value.”
Paul ffolkes Davis, Chairman of Rising Sun Management, investment advisor to Nippon Active Value Fund, said: “Large-cap stocks have driven the market rally for the most part. Our favoured fishing waters, small and mid-cap companies, remain calmer, with the outstanding value available still easy to spot. We have never hedged the yen, which cost us a lot of lost performance over our first three years, and we are not about to start now.
“Although Mr Ueda at the Bank of Japan is naturally cautious, the medium-term trend of Japanese interest rates remains upwards and, over time, we expect the yen to appreciate, as it has been doing. Takaichi-san's elevation appears to be playing well already – we see nothing to make us change our bullish sentiment towards Japan and its markets.”
Name an exciting company from your portfolio
Matthew Brett, Manager of Baillie Gifford Japan Trust, said: “Sega Sammy represents an underappreciated opportunity. With a market cap of roughly $5bn, it’s a fraction of Nintendo’s $100bn-plus valuation but offers a similar – and arguably more overlooked – intellectual property monetisation story. The company has a quirky heritage, starting as a slot machine supplier to US military bases in 1940s occupied Japan, before evolving into an arcade powerhouse and the creator of Sonic the Hedgehog in 1991.
“Today, Sega Sammy owns a rich portfolio of enduring franchises (including Football Manager, Persona, and Angry Birds) – and has begun to unlock their broader potential through film, licensing and digital channels. The quick trivia fact that Sonic the Hedgehog 3 became Jim Carrey’s highest-grossing movie ever underscores the evergreen nature of this ’90s character.”
Nicholas Weindling, Manager of JPMorgan Japanese Investment Trust, said: “Advantest is a standout – a global leader in semiconductor testing with over 50% market share. Rising chip complexity and demand for high-performance computing are driving longer and more intensive testing cycles, creating a favourable mid-to long-term outlook for the company.”
Masaki Taketsume, Manager of Schroder Japan Trust, said: “Mitsubishi Electric. The investment case combines internal change with external tailwinds. On the internal side, the new management team is committed to structurally improving return on equity and return on invested capital through initiatives such as improved capital allocation and business-portfolio restructuring.
“Externally, the company is one of Japan’s largest defence contractors, positioned well to benefit from rising defence spending. Despite these positives, the shares trade at a discount to peers, providing an attractive investment case.”
- ENDS -
Follow us on X @AICPRESS
Notes to editors
- The Association of Investment Companies (AIC) represents a broad range of investment trusts and VCTs, collectively known as investment companies. The AIC’s vision is for closed-ended investment companies to be understood and considered by every investor. The AIC has 291 members and the industry has total assets of approximately £269 billion.
- For more information about the AIC and investment trusts, visit the AIC’s website.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
- To stop receiving AIC press releases, please contact the communications team.
- The Association of Investment Companies (AIC) represents a broad range of investment trusts and VCTs, collectively known as investment companies. The AIC’s vision is for closed-ended investment companies to be understood and considered by every investor. The AIC has 291 members and the industry has total assets of approximately £269 billion.
- For more information about the AIC and investment trusts, visit the AIC’s website.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
- To stop receiving AIC press releases, please contact the communications team.
