Japan may become one of the prime beneficiaries of cooling trade tensions between the United States and China. With a new government that appears intent on supporting growth, foreign investors could find new opportunities in the Asian market.
Recent weeks have seen plenty of optimism grow around Japanese markets, buoyed by domestic and international policies that are set to foster growth.
The arrival of Sanae Takaichi as Japan’s Prime Minister appears to be pivotal in building investor optimism. Takaichi has pledged to intensive public-private investment in fields like AI, semiconductors, shipbuilding, and quantum technology as a means of generating more economic resilience.
Across the East China Sea, the positive trade negotiations between Washington and Beijing saw Japan’s Nikkei 225 index reach a record high, illustrating the scale of the boost that a tariff truce between the superpowers can bring to the region as a whole.
Corporate Governance Reforms
Japan is in the midst of a series of corporate governance reforms that are set to improve the attractiveness of equities listed on the Tokyo Stock Exchange, which has been likened to a ‘governance revolution,’ according to Nicholas Weindling, co-manager of the JPMorgan Japanese Investment Trust.
While Japanese companies have significantly overcapitalized by favoring high cash reserves as well as real estate and shares in other companies throughout their balance sheets, the government has sought to encourage more spending instead.
These expansionary measures are supported by Takaichi, who is a believer in loose monetary policy and investing as a driver of growth.
With Japanese markets enjoying growth of over 15% in 2024, there is evidence that corporate governance reform can not only help to send stocks higher but also reshape how investors and companies understand one another.
By encouraging more spending, traditional income stocks can transform into growth-oriented equities that can substantially increase their returns to shareholders in a way that had previously been secondary for listed companies.
Shifting Monetary Opportunities
Japan has also recently snapped out of a long-term deflationary trend, returning to inflation for the first time in decades.
The Japanese Yen (JPY) is one of the world’s most traded currencies, due to the Bank of Japan’s ultra-loose monetary policies in recent years. The currency is widely viewed as a safe-haven investment that can increase its value during periods of market stress against other, more volatile currencies.
However, this shifting monetary outlook has contributed to changing perceptions when it comes to cash hoarding among companies and investors alike. Where deflationary environments can reward cash hoarding, an inflationary landscape can make a major cultural impact on investment decisions.
Despite wage growth remaining flat for much of the 21st century, the post-pandemic era has brought a period of sustained pay increases that may also contribute to higher growth as consumer confidence rises domestically. However, the Japanese economy doesn’t necessarily move in line with the stock market.
Uptick in Private Equity
Japan’s private equity sector has been a key component of a wider regional recovery. Although the prospect of compelling returns has caused the Asia-Pacific region to become particularly attractive to investors of late, Japan’s strong momentum has seen an uptick in sentiment.
Private equity in Japan built on a record-breaking 2024, which saw venture capital-backed investment rise 40.8% year-over-year to $17.9 billion. This uptick in activity saw the nation’s share of Asia-Pacific PE deals rise from 10.6% in 2023 to 15.6% last year.
Following a flurry of mega deals in Q1 2025, Japan recorded $21.4 billion, setting the nation’s private equity totals on course to smash its 2024 totals.
This significant increase in deal values has been aided by the post-pandemic recovery, as well as rising competition, higher entry valuations, and a renewed emphasis on ESG and technological innovation. As a result, Japan has emerged as one of the world’s most attractive private equity destinations.
With Prime Minister Sanae Takaichi committing her government to investing more in emerging technologies, as well as traditional industries like shipbuilding, the nation’s growing share of the Asia-Pacific region’s private equity markets could see further increases as the clearing trade landscape continues to foster optimism.
Looking to 2026
Looking ahead, Japan appears to be in a strong position to benefit from growing trade optimism in Asia following a period of uncertainty surrounding the global trade outlook and its implications for key Asian markets.
Although the nation has long been associated with a deflationary monetary policy and overcapitalized markets, it appears that Takaichi has prioritized growth at a time when tech innovations are driving significant growth in the United States and beyond.
By looking to unlock Japan’s potential as a hotbed for ambitious growth stocks, we could see private equity continue to grow, delivering bold new opportunities for global investors looking for new options in the Asia-Pacific region.
