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America’s ‘Magnificent Seven’ mega-cap technology stocks may be stealing all the headlines, but Japan’s Nikkei 25 has been the stock market to beat so far in 2024. This week, the Nikkei 225 Index finally forged through the 39,000 level, surpassing by a whisker its previous peak in 1989.1 Does Japan’s renaissance have staying power?

What’s driving Japan’s market higher?

In short, interest rates and a weak currency. Ultra-low rates have boosted Japan’s growth potential and the competitiveness of its export sector by virtue of a weak yen. Two years of inflation staying above zero have also reinforced sentiment.

Given its deflationary past, Japan has been ultra-slow to raise ultra-low interest rates even as inflation has increased. While much of the rest of the world wrestles with rates in the 4.5% to 5.5% range, Japan’s benchmark interest rate is still at minus 0.1%. The Bank of Japan adopted a negative interest rate in 2016 as part of an effort to deter saving and boost investment and spending.

Another factor is probably Japan’s location at the heart of Asia. Some investors have been unnerved by setbacks in China since the pandemic, improving the chances that Japan returns to being the default choice for investors seeking a regional exposure.

Jeremy Osborne, investment director of Fidelity Japan Trust said that Japanese equities still offer compelling value and investors are underexposed to the market.

“The strong performance of Japanese equities since last year has been supported by several key supports. Chief among them are the country’s shift towards moderate inflation, corporate governance reforms enacted by the Tokyo Stock Exchange (TSE), the Bank of Japan’s accommodative policy stance and accompanying weakness in the yen, and renewed buying among overseas investors,” said Jeremy.

Why does Japan have a technological edge?

Japan’s legendary expertise in machinery and electronics manufacturing bodes well for a future being shaped by technological advance. From electric vehicles and artificial intelligence to integrated circuits and robotics, Japan has a proven ability of turning ideas into reality.

As elsewhere in the world, technology related shares in Japan’s have enjoyed special attention. Recent gainers have included the semiconductor chip firms Tokyo Electron and Advantest.

Why has it taken so long?

The excesses of the 1980s took a long time to unwind, as did the dismantling of opaque corporate structures and restructuring of bad debts. The biggest problem however was deflation, which became entrenched during the late 1990s and 2000s. This created a downward spiral of falling prices and deferred consumer spending.

Today, Japan is the only major country where inflation is viewed as an asset. Thus, the post-pandemic boom in consumer prices has provided a boost. Japan exited deflation in 2022 and consumer prices rose by 3.1% in 2023.2

Is it too late to take part?

Valuations might suggest not. The MSCI Japan Index trades on 15 times the earnings companies are expected to make over the next 12 months compared with around 18 times for world markets.3

After the market’s recent gains, Japanese shares are no longer cheap. However, they do trade at less than a half of the 40 times forward earnings the stock market was trading at in late 1989, and only a fifth of the 75 times seen after Japanese corporate earnings collapsed in the early 1990s.4

Based on this, Japan is a long way from entering bubble territory.

Still, Japan’s leading stock index the Nikkei 225 has put on a gain of close to 50% since the beginning of last year in yen terms.5 Recent volatility in the US shows investors are clearly nervous about the ability of high-flying US tech shares to keep going, and the same could start to apply here.

Source:, 1.3.1988 to 22.2.2024

Past performance is not a reliable guide indicator of future returns. 

What about the yen?

Japan’s currency is down by about 20% against the pound since the beginning of last year.6 While a weak yen boosts Japan’s competitiveness, it also eats into the returns enjoyed by UK investors.

The yen has firmed a little since the start of this year because the Bank of Japan is widely expected to raise interest rates, just as other countries are anticipated to be embarking on rate cuts.

What’s the outlook?

Japan’s best period for post-pandemic growth may have now passed. Last month the IMF saw Japan’s growth rate at just 0.9% in 2024 falling to 0.8% in 2025. That’s way below the 3.1% and 3.2% growth it expects from the global economy.7

The current picture is somewhat worse. Japan accompanied the UK into a technical recession in the final quarter of last year. The economy slipped back 0.4% after contracting by a revised 3.3% the quarter before.8

There are, however, other positive trends at work. According to data compiled by Bloomberg, company profits probably reached an historic peak in the final quarter of last year.9

Also positive are new governance rules under which businesses are required to improve shareholder returns. Some have been doing this by buying back their own shares; others through higher dividend payouts.

It’s important to remember though that Japan continues to face difficult hurdles. It remains home to a rapidly aging population and births are at a record low. Japan also experiences difficulty in attracting international talent owing to an unfamiliar language and culture and resistance to immigration among some sections of the local population.

This combination of demographics and policy preferences makes the productivity gains needed to maintain Japan’s wealth harder to achieve.

For all these reasons, Japan is a place where actively managed investment funds can add value. Certain shares and market sectors are better adjusted than others to secular changes in both Japan and the wider world – for example, healthcare companies, financial services companies and technology providers.

Tom Stevenson, investment director said longer term, there’s an even balance of pros and cons for investors in Japan.

“The biggest positives relate to a wall of money that could find its way into the market if encouraged to do so. Around half of the vast savings of Japanese households are held in cash with just 11% in shares. That compares with the US where 13% of household wealth is in cash and nearly 40% in shares,” said Tom.

One catalyst for changing that balance was implemented last month.

“Japan’s NISA (similar to our own ISA) saw its annual investment limit double while its previously time-limited tax-exempt period was made indefinite,” said Tom.

But for Japan’s stock market to continue making significant progress, Tom said it must raise its productivity fast. This is to overcome the country’s deep-seated demographic deficit.

Japan’s birth rate has been falling for years. At under 1.3 births per woman, it is well below the replacement rate. The population has been dropping for a decade and a half and is projected to be under 90 million by 2070, down from 125 million today.

Investing ideas

Fidelity’s Select 50 list contains three funds dedicated to Japan – an index tracker and two actively managed funds with contrasting investing styles.

The Baillie Gifford Japanese Fund is an actively managed portfolio with a bias towards large Japanese companies.  It aims to deliver growth over the long term and draws upon the expertise of the largest team of Japan specialists outside Japan. Current large holdings include the conglomerate SoftBank; Nintendo; and the financial services group SBI Holdings.

The iShares Core MSCI Japan Fund offers a wide-ranging, agnostic exposure to Japan. Managed by BlackRock, a seasoned passive funds manager, it is designed to track the MSCI Japan Index and benefits from a low ongoing annual charge of around 0.12%.

The Schroder Japan Trust works differently. This is an investment trust run by a team based in Japan with a very strong research capability. It has an unconstrained, contrarian approach, seeking out opportunities to invest in companies that are out of favour with the market. The trust currently trades at an 11% discount to its net asset value.10


  1. Bloomberg, 22 February 2024 
  2. MSCI, 31 January 2024 
  3. Statistics Bureau of Japan, 19 January 2024  
  4. Financial Times, 25 August 2010 
  5. Bloomberg, 22 February 2024  
  6. Bloomberg, 22 February 2024 
  7. IMF, 30 January 2024 
  8. Cabinet Office of Japan, 15 February 2024  
  9. Bloomberg, 20 February 2024  
  10. Schroders, 21 February 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Please be aware that past performance is not a reliable guide indicator of future returns. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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