Nikkei and Japanese stocks: a new investment story?

After decades of stagnation, the Japanese stock market is returning to the spotlight for investors. The Nikkei 225 index has strengthened significantly in recent years, and more global funds are beginning to increase their exposure to Japan.

The reason is not just cyclical economic growth. Behind it lies a combination of structural changes, the return of inflation, and also a new political dynamic following the rise of Prime Minister Sanae Takaichi.

Political catalyst: the Takaichi government

The election of Takaichi means relative continuity in economic reforms for the markets, but also a greater emphasis on industrial and technology policy.

Her economic agenda rests on several key points:

•support for the domestic capital market

•investment in technologies and semiconductors

•strengthening the defense sector

•pressure for more efficient operation of Japanese companies

It is important for investors that the government continues corporate governance reforms that force companies to work better with capital and to think more about shareholders.

Why Japanese stocks are interesting again

Several factors are creating a relatively strong environment for the Japanese market.

1. Return of inflation After long years of deflation, inflation in Japan has stabilized around a few percent. This supports wage growth, consumption, and corporate revenues.

2. Improvement in corporate governance The Tokyo Stock Exchange is pushing companies to increase return on capital. The result is more dividends and buybacks.

3. Weak yen A weaker currency significantly helps exporters. Companies like Toyota thus generate strong foreign revenues.

4. Inflow of foreign capital Large global investors have begun to view Japan again as an alternative to the U.S. market, which is significantly more expensive today.

Key sectors of the Japanese market

Technology and semiconductors

Japan plays an important role in the global supply chain of the chip industry. Companies produce machines, materials, and testing technologies for semiconductor manufacturing. The growth of AI and data centers is creating strong demand for these products. ($TOELY, $ADTTF)

Automotive industry

Automakers remain one of the pillars of the Japanese economy. Hybrid technology and global exports still give Japanese companies a competitive advantage, although pressure from Chinese electric vehicle manufacturers is gradually rising. ($TM, $HMC)

Defense sector

Rising geopolitical tensions in Asia are leading Japan to increase military spending. This can support domestic industrial giants and defense technology manufacturers in the long term. ($MHVYF, $KWHIY)

Risks to the investment thesis

The Japanese story of course also has weaker aspects. The biggest include:

•energy dependence – the country imports most raw materials

•aging population

•sensitivity to the global trade cycle. The export-driven economy is strongly dependent on worldwide demand.

Investment conclusion

•Japan today offers a fairly unique combination of factors:

•political stability

•structural corporate reforms

•rising corporate profits

•relatively lower valuations than in the USA

Do you still think the Japanese market is undervalued, or has the Nikkei already priced in most of the positive scenario?