A Stable Market Amid Global Volatility
After a steep, tariff-driven market decline in April, both U.S. and global equities rebounded in May. However, markets remain highly volatile as trade negotiations continue. In contrast, Japan’s stock market has shown relative stability, largely supported by solid domestic fundamentals rather than being driven by daily headlines.
During the first half of 2025, Japan’s equity market outperformed major global indices. The MSCI Japan Index gained 7.7%, compared to just 0.56% for the S&P 500 and 3.59% for the S&P Global 100 Index.
This performance has attracted strong interest from local investors. The iShares MSCI Japan ETF (IJP) has seen over $112 million in inflows year-to-date - almost matching its total for all of 2024. This puts IJP among the top 10 ETFs by inflows so far this year, a clear sign that Australian investors are turning to Japan in search of better returns amid global uncertainty.
An Economy on the Upswing
After decades of sluggish growth, deflation, and ultra-low interest rates, Japan’s economy is showing signs of structural improvement. A tight labor market—exacerbated by an aging population—is driving steady wage and price increases. This has contributed to the fastest growth in nominal GDP Japan has seen since the 1980s.
According to Japan’s Ministry of Labour, Health and Welfare, scheduled cash earnings for university graduates rose 5% in 2024, compared to just 1% a decade ago. This highlights how the younger workforce is now playing a more active role in lifting incomes across the country.
Corporate Governance Reforms
Recent changes to corporate governance are also paying off. Since 2023, stricter listing rules on the Tokyo Stock Exchange have encouraged companies to return more capital to shareholders. Share buybacks have hit record highs this year, while less profitable companies are being delisted or restructuring to improve earnings and efficiency.
A Wealthy Consumer Base
Japan’s households remain a powerful economic force, sitting on approximately $14 trillion USD in financial assets - about half of which is in cash. This is a much higher cash allocation than in markets like the U.S. or Europe, where equities and pension funds dominate.
These reserves are already having an impact. With the introduction of the Nippon Individual Savings Account (NISA) in early 2024, Japanese investors are now receiving tax incentives to shift money from low-yield cash into stocks and managed funds. As a result, net inflows into Japanese managed funds doubled year-on-year in 2024.
Markets May Have Weathered Worst of Tariff Risk
Japanese equities offer both diversification and the potential for long-term gains. One major benefit is reduced concentration risk: the largest sector weighting in the MSCI Japan Index is 24%, compared to 34% in the S&P/ASX 200 and 32% in the S&P 500.
Currency exposure is another important consideration. With inflation rising, the Bank of Japan may begin raising interest rates later this year. This could lead to a stronger yen, which historically tends to appreciate during periods of global market stress. Because of this, unhedged investments in Japanese equities may provide added upside through currency gains.
The iShares MSCI Japan ETF (IJP) offers exposure to roughly 85% of Japan’s total stock market capitalisation. It can serve as a core holding for investors looking to broaden their global equity exposure while potentially benefiting from a stronger yen.
Conclusion
Japan is re-establishing itself as a strong and stable market for investors. Despite ongoing global trade tensions, domestic factors - including wage growth, corporate reforms, and household wealth are helping drive economic momentum. As volatility around tariffs fades, Japan’s fundamentals suggest that its equity market could continue to outperform in the months ahead.
Source: BlackRock. (2025, June 18). Japanese equities on the fast track.