A portfolio manager is describing something that would have seemed unthinkable five years ago in the foyer of a fund management company in Marunouchi, Tokyo’s crowded financial area where glass towers catch the sun off Tokyo Bay on clear mornings.
The intriguing market is Japan. It’s not intriguing as a currency hedge or defensive move, but it’s intriguing in the same way that a compelling company narrative is intriguing because the statistics are shifting due to structural factors that have been difficult to comprehend and are just now fully apparent in share prices. Early in June 2026, the Nikkei 225 was trading above 66,000. For the first time since 1989, it surpassed 50,000 in late 2025. The weak yen is the simple answer. The more precise explanation is more intricate and long-lasting.
The Tokyo Stock Exchange’s effort for governance reform, which gained significant traction in March 2023 when it mandated that businesses trading below book value reveal plans to increase capital efficiency, has been subtly rearranging the way Japanese companies distribute their capital. For many years, Japanese corporations maintained large cross-shareholdings, or stakes in each other’s enterprises, frequently with little strategic purpose other than keeping steady, cordial ties with partners and suppliers. These cross-shareholdings kept shareholder returns structurally low and locked up a significant amount of cash in unproductive holdings.
The Financial Services Agency’s advice and the TSE’s demand to unwind them have caused buybacks and dividends to soar. Once written off as “value traps”—companies that consistently traded at book value discounts without a clear catalyst—these companies are now providing the shareholder returns that foreign investors had been anticipating since the 1990s.
In its January 2026 outlook, BlackRock referred to this as a possible long-term re-rating. Beginning in 2020, Warren Buffett’s decision to gradually boost Berkshire Hathaway’s holdings in the five major Japanese trading firms was an early and very noticeable indication that the underlying investment case had altered.
The aspect of the rise that has been most difficult to convey without sounding like the same narrative being told about every market at once is the AI and semiconductor component. However, Japan’s exposure to this specific cycle is real rather than coincidental: TSMC’s establishment of fabrication capacity in Kumamoto has boosted the larger semiconductor ecosystem; SoftBank’s investments in Arm and OpenAI have given it direct positioning in the core infrastructure of the AI build-out; and Japanese manufacturers of production equipment, such as Tokyo Electron and Shin-Etsu Chemical, are direct suppliers to the factories that every major technology company is vying to construct.
Not only did the hyperscalers in Silicon Valley profit from the AI investment cycle’s acceleration in 2024 and 2025, but upstream suppliers in Kumamoto, Kyoto, and Yokohama also saw an increase in share prices. Because it is the most anticipated, the reflation tale may be the most structurally significant. For around thirty years, Japan was in a deflationary trap, a self-reinforcing cycle in which declining prices caused consumers to postpone purchases, which in turn weakened corporate pricing power, kept wages stagnant, and further decreased demand. It took a very long time for the Bank of Japan’s unconventional monetary measures, such as yield curve control and negative interest rates, to break that cycle.
With positive core inflation exceeding the Bank of Japan‘s 2 percent target, wage negotiations yielding the biggest pay increases in decades, and household consumption exhibiting signs of a true recovery rather than the fleeting spending bounces that had repeatedly disappointed earlier in the lost decade era, 2024 and 2025 have produced the clearest evidence yet that the exit from deflation is real rather than temporary.
The Marunouchi portfolio manager would be the first to clarify if the currency issue can be safely put aside. Since overseas operations currently account for about 60% of the income of large Japanese corporations, the weakening of the yen mechanically inflates reported earnings when those gains are repatriated into yen. The earnings translation impact reverses if the yen appreciates considerably, and normalization of Bank of Japan policy is a serious prospect over the next 12 to 18 months.
Alongside the earnings data, analysts following the Nikkei’s 60,000 objective are keeping a careful eye on the USD/JPY ratio and Japanese government bond yields. There are actual structural drivers. There is also actual currency uncertainty. When seeing Japan’s market from the outside in June 2026, it can be difficult to tell which portion of a 26 percent yearly increase is long-term reform and which portion the yen will eventually give back. In all honesty, both questions are still unanswered.
