JPN225——Emerging from the Lost Thirty Years, Japan’s Asset Revaluation Enters a New Stage

If 2023-2025 is the first phase of Japan’s stock market revaluation, with the driving forces mainly coming from valuation repair and governance reforms, then as we enter 2026, JPN225 is moving into a more complex—and more promising—second phase, where profit growth and capital reflow resonate together.

The logic of the first phase is relatively straightforward: Japan’s stock market is too cheap. For many years, more than half of the companies among the Nikkei 225 constituents have had a price-to-book ratio below 1x, and this extreme undervaluation itself creates momentum for mean reversion. A single announcement from the Tokyo Stock Exchange ignited a race among companies to improve capital efficiency, and stock buybacks and dividend payments poured in one after another. Overseas hedge funds were among the first to rush in, driving the index’s first wave of rapid gains. But once the valuation repair reaches a certain level, the market naturally asks: what will drive the stock prices higher from here?

The answer is starting to take shape. First, Japanese companies’ earnings growth is becoming more sustainable. In the past, Japanese corporate profits relied heavily on exchange gains brought by a weaker yen, and the market discounted the quality of those earnings. But now, with the recovery of domestic consumption in Japan and the rebound in nominal GDP growth, the share of revenue growth driven by domestic demand is increasing, and the profit structure is improving. Inbound tourism has remained booming, with capital expenditures and profit margins improving in the hotel, retail, and catering industries in tandem. More importantly, Japan’s technological advantages in semiconductor materials and equipment have been repriced in the context of explosive demand for AI chips—related companies have sufficient orders and are operating at full capacity, with full production and full sales. This is solid, hard-tech strength.

Second, Japan is experiencing a long-term capital reflow. Over the past thirty years, Japanese domestic investors have continuously directed funds overseas, seeking higher yield. But as domestic interest rates rise again, economic vitality recovers, and corporate earnings improve, this trend is reversing. Japanese life insurance and pension institutions are beginning to reduce their allocation to overseas bonds and shift funds back to domestic stock and bond markets. This massive amount of long-term capital is gradually turning toward home; once it forms a trend, it will provide sustained incremental funds for the Nikkei index.

Of course, risks still exist. The pace of the Bank of Japan’s rate hikes is the biggest uncertainty. If rate hikes are too fast and cause the yen to appreciate rapidly, earnings for export-oriented stocks will be hit, potentially triggering a phase of correction. But from the perspective of long-term asset allocation, Japan’s stock market is gradually moving from a market that global investors have systemically underweighted toward a normal weighting that matches its economic size—this process is far from finished. For global capital looking to diversify away from concentrated risks in US stocks, JPN225 still has irreplaceable strategic allocation value.

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