In this Wealth DFM exclusive, renowned Japan specialist Richard Aston, Portfolio Manager of the CC Japan Income & Growth Trust and the Chikara Japan Income & Growth Fund, tells us why he’s optimistic about the powerful forces driving foreign capital back into Japanese equities. His always popular insights reveal why lasting reform, revived domestic demand and a maturing market ecosystem are reshaping Japan’s investment story.
The Japanese equity market has been somewhat overlooked by global investors through recent history.
While the excitement of the Abenomics era drew in record levels of foreign capital in the early 2010s, this faded over the years as many became jaded by persistent deflation and protracted reform.
Today, the landscape looks very different. Both international and domestic investors are being won over by lasting improvements in corporate governance.
The positive sentiment is being compounded by Sanae Takaichi becoming Japan’s first female prime minister as well as the return of inflation and policy shifts underscoring the maturity of the Japanese market Foreign inflows into Japanese equities have accelerated significantly and valuations are likely to follow.
Foreign Optimism
During the heyday of Abenomics – between 2013 and 2015 – foreign investors consistently poured increasing amounts of capital into Japanese markets. Cumulative international flows since the end of 2012 hit an extraordinary peak of 25.3 trillion yen in mid-2015.
However, sentiment made an abrupt about-turn and flows began to reverse. Over the following decade, foreigners gradually unwound their positions as expectations for faster reform and a decisive end to deflation faded.
This year has brought a striking change. As the chart below shows, from the second quarter of 2025, investors have purchased roughly 10.1 trillion yen of Japanese equities.
Foreign flows into Japan – Source: Daiwa
That’s a rate of inflow comparable to that seen during the early stages of the Abenomics excitement. The difference this time is the investment case is more easily justified by over a decade of delivery, rather than pure anticipation.
We believe the key driver is recognition of the progress Japan has made on corporate governance.
Prime Minister Abe got the ball rolling with stewardship and governance codes that began to transform the treatment of shareholders. Since then, the Japan Exchange Group has accelerated the momentum even further.
Its reforms to the Tokyo Stock Exchange created new listing categories in 2022 that place corporate governance at the centre of company strategy.
According to the Tokyo Stock Exchange’s guidance, initiatives such as an 8% return on equity benchmark and a requirement for Prime market firms to achieve a price-to-book ratio above 1 have sharpened the focus on profitability and capital efficiency.
Importantly, companies failing to articulate plans have been named publicly, making a notable rise in corporate accountability over the past decade.
These changes have observable trends. Namely, steady growth in dividends and share buybacks, as well as a reduction in inefficient cross-shareholdings.
When this is combined with global concerns around the US – ranging from tariffs and trade friction to the weaker dollar and questions about growth – Japan has emerged as an attractive alternative.
Particularly encouraging is the similarly strong inflow of foreign capital into the Japanese private equity and real estate markets from investors with long time horizons. Their multi-year commitments suggest a confidence in the outlook for Japan and asset valuations.
Domestic Support
Another positive shift has come from within.
Historically, Japanese households have been extremely cautious, keeping a large share of assets in cash. Deflation reinforced this behaviour, with little incentive to take risk. But now, with inflation finally returning, the shift has altered investor behaviour.
In an inflationary environment, cash holdings erode in value, and equities become more compelling. And a recognition of this reality among Japanese investors is being reflected in the data.
Outflows from equities held by domestic investors have slowed, while participation in tax-advantaged Nippon Individual Savings Accounts (NISAs) has risen sharply. Likewise, the share of household assets held in cash has begun to decline.
This all matters because it means foreign buying is no longer being offset immediately by domestic selling. Instead, the two are working together, creating a more supportive backdrop for Japanese equities than at any point in recent memory.
BoJ Reduces Intervention
The contrast with the Abenomics era is important.
Back then, optimism was built largely on expectations that deflation would end and governance would improve. In reality, both took longer to materialise and foreign investors lost patience.
Today, however, those conditions are not hypothetical; they are visible in the data and in company behaviour. Inflation is entrenched and corporate governance reforms are institutionalised and delivering results.
Perhaps the clearest signal of how far the market has matured is the Bank of Japan’s recent announcement that it will begin selling part of the 250 billion yen in ETFs it accumulated between 2010 and 2023.
Long anticipated, the shift indicating expectations that private capital will play a larger role in market support.
It also suggests a healthier equity ecosystem in which valuations are driven by fundamentals and investor demand rather than policy intervention.
A Firmer Footing
Taken together, renewed foreign inflows, rising domestic participation, entrenched reforms, and a central bank stepping back from direct equity support form a powerful case for Japan’s equity market.
The conditions are stronger than in the early 2010s, and the flows are increasingly long-term in nature.
If the past year’s momentum is any guide, the next phase of Japan’s equity story may prove both durable and transformational.
Richard Aston is portfolio manager of the CC Japan Income & Growth Trust and the Chikara Japan Income & Growth Fund
