Japan has shifted from behaving like an equity market where investors focused on companies with low margins and high capex to one centered on efficiency and return on capital, where governance has become the cornerstone of this transformation. “The underlying story in Japan is extremely attractive,” says Simon Morton-Grant, Client Portfolio Manager of the CT (Lux) Japan Equities fund at Columbia Threadneedle Investments.
The expert, who recently visited Spain, highlighted the multiple growth catalysts his firm currently sees in this market: first, efforts to continue increasing shareholder returns (ROE) remain in place, with a new record for share buybacks in 2025; second, the country is once again posting positive growth, and after deep reforms in recent years, the TOPIX index has become a reflection of that growth; third, Japanese household savings amount to around $14 trillion, and half of that money is held in cash, leading the firm to expect—in a context of rising inflation—that part of those savings will flow into equity markets to avoid loss of purchasing power; fourth, the expert highlights the willingness of the new government to continue deep political and economic reforms to further stimulate national growth. For these reasons, the expert is clear: “Any point of weakness from here on could be a good entry point to invest in Japan’s long-term structural growth story.”
Is the rise in geopolitical risk due to the Iran conflict affecting the Japanese stock market in any way?
We want to make it clear to our clients that disruptions around the Strait of Hormuz have the potential to impact the global economy. Japan imports more than 90% of its crude oil from the Middle East, although it makes virtually no direct imports from Iran. We believe that, for now, this situation remains contained in Japan’s case, as it has several measures to mitigate these effects. First, it has oil reserves equivalent to 245 days—one of the highest coverages among developed economies, roughly eight months—which provides a short-term buffer. Second, Japanese authorities have estimated that oil prices would need to reach and remain at $175 per barrel for a prolonged period for Japan to enter a recession; currently, we are far from that level. Even if it were reached, it would need to be sustained for some time.
This is therefore a risk that must be monitored. However, the team has just returned from Japan and, in meetings with companies—at a time when this situation was already beginning to unfold—firms believed they could pass on increased costs to consumers without materially affecting margins. It is an evolving conflict and should be closely watched for changes, but at current levels we do not see a cause for excessive concern.
Can movements in the Japanese yen significantly impact Japanese companies, especially exporters?
It should be noted that we are not macroeconomic specialists. That said, we believe that if the yen were to exceed 160 against the dollar, the government or the Bank of Japan could intervene. Within the 140–160 range, the environment remains relatively comfortable for Japanese equities. Moreover, the historical correlation between a rising Japanese stock market and a weakening yen has diminished in recent years. Japan is no longer necessarily a bet on a weak yen. The economy now has more growth drivers: domestic companies are contributing to earnings growth and, therefore, to index performance, something that was not the case 10–15 years ago, when exporters were the main engine. In the portfolio, we have a natural hedging mechanism: a weak yen benefits exporters, while a strong yen favors domestic businesses.
Sanae Takaichi plans to deepen Abenomics. How could this affect your asset class?
We do not usually pay much attention to changes in prime minister, but in this case it is relevant. She is a potentially transformative figure who breaks with the traditional profile of Japanese political leadership and maintains a strong pro-growth focus. She is an heir to Shinzo Abe’s legacy: expansionary fiscal policy, accommodative monetary policy, and significant fiscal stimulus. We believe her economic and reform agenda could boost the market and open a new phase of growth in Japan. In addition, the new governing coalition has a clear pro-growth bias and supports decentralization, shifting part of the economic weight from Tokyo to other regions such as Osaka. This could increase the value of land and assets in those regions and foster greater economic dynamism.
Another key element is her industrial policy and the associated investment opportunities. Takaichi prioritizes increased spending on artificial intelligence, semiconductors, nuclear reactivation, defense, and economic security. These areas form a new universe of opportunities under the current administration. She has also managed to unify the party, attract younger support, and consolidate a stable political base—crucial for implementing meaningful reforms.
Where do valuations currently stand?
Compared to historical averages, valuations have increased slightly over the past year. However, the higher multiples often highlighted in the media are heavily influenced by large-cap and more expensive stocks. Looking at the TOPIX index, around 35% trades below book value, indicating that many attractive opportunities still exist. In relative terms, while U.S. valuations are above their historical average, Japan remains cheaper, especially in a context of rotation away from U.S. exceptionalism.
Where are you finding opportunities?
Historically, Japan has been associated with automation, a highly sought-after sector. However, following a recent visit, the team has identified new areas of interest. First, infrastructure renewal. Two growth drivers coexist: on one hand, more visible sectors such as artificial intelligence or electric vehicles, with strong demand but higher cyclical sensitivity; on the other, the replacement of infrastructure built during the late-1980s bubble. The latter represents structural, stable, long-term demand, especially in construction.
Second, the so-called “oshikatsu” economy, or fandom economy, where consumers follow athletes, actors, or content creators. This phenomenon, particularly relevant among Generation Z, creates opportunities in merchandising and digital platforms. Third, economic security and defense. The new government is adopting a firmer foreign policy stance, and increased defense spending as a share of GDP opens opportunities in shipbuilding, cybersecurity, and other segments.
Of course, we remain exposed to companies linked to robotics, a structural trend in Japan, which accounts for approximately 50% of the global industry.
What risks are you monitoring?
One of the main focuses is public debt. Although the debt-to-GDP ratio is around 200%, 90% of the bonds are held domestically, which provides stability. In addition, high tax pressure and a near-zero deficit reinforce sustainability. By comparison, the U.S. or China have deficits of around -6%. The second risk is geopolitical, particularly in the relationship between Japan and China. While tensions exist, we do not anticipate structural deterioration, given the significant global impact it would have. Finally, the Middle East remains the main short-term risk. Oil price developments will be key, as they could trigger inflationary or energy tensions in Japan.
Do you expect a rebound in inflation in Japan?
It is possible in the current context, but levels remain manageable. The Bank of Japan postponed a rate hike initially expected in March, likely to April or May. Even if rates reach 1% or 1.25%, monetary policy would remain accommodative. We believe the Bank of Japan is in a normalization process, not a tightening cycle. At current inflation levels, companies can pass costs on to consumers without significant impact. This reflects a structural shift in Japan toward a virtuous cycle of wage growth and inflation, which could be positive for the economy, economic policy, and markets.
