Japan stock market and funds review – 4 things that could drive Japan’s market higher

With geopolitical tensions and the focus on the US and Europe recently, Japan hasn’t been in the spotlight. That doesn’t mean Japan will escape the noise though.

For example, US trade tariffs could have a far-reaching impact across the globe and it’s difficult to know what policies might emerge next.

For now, Japan seems to be on its own path in terms of growth, inflation and interest rates, which will have implications for investors.

Importantly, it means the Japanese stock market can behave quite differently from others and can act as a source of diversification as part of a broader investment portfolio.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice.

Is Japan’s battle against deflation over?

While many countries have been fighting to keep inflation down, Japan has been encouraging it. Now it finally seems to have broken out of its deflationary slump that started in 1990 – inflation rose to 4.0% in January 2025.

As a result, the Bank of Japan (BoJ) has been raising interest rates, which has also seen Japanese government bond yields rise.

A year ago, the BoJ raised rates for the first time in 17 years, ending eight years of negative rates. It has since raised rates twice more and implied it will eventually raise them to 1%, from a current level of 0.5%.

Wage negotiations have helped to drive the rising prices.

Japanese workers had become accustomed to subdued wage growth for many years – but haven’t had much need for it either given the prices of goods and services have also remained flat.

Over the past two years though, Japan’s annual ‘shunto’ (wage negotiations) has seen the highest pay rises over the past 35 years.

Japan’s demographic problems have also contributed to this wage growth. Partly as a declining population means younger workers have greater power to negotiate higher wages.

Overall, rising inflation means consumers are more likely to buy goods now rather than in the future when prices could be higher. This virtuous cycle of rising prices and wages could improve demand and consumption, generate growth, and boost inflation.

It hasn’t been a smooth ride to get to this point though, and raising rates can have other implications, like increasing mortgage rates, which can put pressure on household incomes. Inflation has also been greater in some areas than others, like food, which again could make things feel worse for consumers.

Entering a prolonged period of inflation should be taken as a positive, but it’s a step change for businesses and consumers that they’ll need to adapt to.

How have Japanese stock markets performed?

Aside from a period of heightened volatility last August, it’s been a relatively uneventful year for the Japanese stock market.

Over the year to the end of February 2025, the MSCI Japan Index grew at a moderate 1.51%*.

This is some way behind the broader global stock market – the MSCI AC World Index grew 16.10% over the same time. The global stock market has benefited from its large allocation to the US, in particular large tech companies, which have performed well over the past year.

Don’t forget though that different markets and sectors will come in and out of favour.

Remember, all investments and income from them can fall as well as rise in value, so you could get back less than you invest. Past performance also isn’t a guide to the future.

The difference in the way growth and value companies perform continued throughout the year, and, unlike some other major global markets, Japanese value funds performed much better.

Growth companies are expected to grow their earnings at a more predictable rate or have exciting growth potential. In contrast, the share prices of value companies don’t typically reflect their true worth and could rise as they come back on to more investors’ radars.

Over the year, the broader index of Japanese value companies grew 7.80%, while growth companies lost 4.60%.

A push to improve the corporate governance standards of Japanese companies has had some impact here. These changes have had a greater impact on companies with low valuations, as many were seen to have lower corporate governance standards to begin with.

Looking to the rest of 2025, there are a few potential drivers of performance for the Japanese stock market. A continued improvement in corporate governance, wage rises, an ongoing shift from cash to investments by Japanese households, and the potential for the major public pension funds to increase investments in Japanese shares could all help.

That said, uncertainties also remain, including potential changes in BoJ and political policies.

How have Wealth Shortlist funds performed?

Japan’s stock market is often style driven. This comes down to lots of Japanese companies showing traits and characteristics that define either growth or value investing.

That means when a rotation in style occurs, it can impact performance. And over the last year, value companies have outperformed growth.

For more details on each fund and its risks, use the links to their factsheets and key investor information below.

Remember, investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own and they understand the specific risks of the fund before they invest.

Man Japan CoreAlpha

iShares Japan Equity Index