“We have a positive view for the Japanese equity market in 2026,” Saso told this news service in an interview yesterday. He believes that inflation is here to stay, which will alter the dynamics of the Japanese stock market in future. One consequence of this is that market leadership is likely to pass to more domestically-orientated stocks such as services, transport and construction. He also thinks that the political situation supports Japanese equities, as well as improvements in corporate governance.

Saso believes that with many stocks still being undervalued, there are attractive investment opportunities to be found.

In conjunction with the announcement of snap elections, Prime Minister Takaichi unveiled an election pledge to reduce the consumption tax on food and to increase government spending which affected bond markets. The yield on the 10-year Japanese government bond rose from 2.18 per cent on 16 January to 2.35 per cent by 20 January. However, Takaichi’s plan to reflate the economy in 2026 is seen as positive for Japanese equities and the Japanese yen (JPY), less so for Japanese government bonds.

The government wants to continue ramping up the country's growth after it had languished for decades following stocks slumping in the late 1980s. A series of corporate governance, fiscal and monetary reforms in the past decade have started to shift Japan's economic fortunes, attracting international investors – as noted here, for example.

David Chao, global market strategist, Asia-Pacific (ex-Japan) at US-headquartered investment manager , predicts a decisive victory for the ruling coalition. “The latest surveys signal a strong win for Takaichi’s administration, with a single party majority potentially in reach,” he said.

“A decisive win for Takaichi could be the best outcome for markets over the medium term, as strategic investments and tax reform bolster equities. And despite our more dovish Bank of Japan expectations relative to market pricing, we think the yen may gain support from a gradual increase in real rates as inflation is set to slow more than is currently appreciated,” Kochugovindan continued.

“Finally, while Japanese government bond markets are at the sharp end of global long-end pressures, bond market volatility could gradually subside after the election. Despite expectations of excessive fiscal expansion, market dynamics appear to be acting as a constraint for Takaichi.”

SuMi TRUST also does not expect the 10-year Japanese Government Bonds (JGB) yield to exceed 2 per cent within this year. In such a case, the impact on the real economy, for example personal consumption and capital investment, is expected to be limited. As a result, Saso foresees no significant disruption to Japan’s path of stable economic growth. SuMi TRUST sees JGBs as becoming an increasingly attractive asset for both domestic and international investors.

Equities and tech

On equities, Saso is positive, in particular on long-term quality growth names in areas such as digitalisation and artificial intelligence. He is bullish about Japan’s tech industry, and positive about Japan’s semiconductor industry.

Stocks held due to their anticipated medium-term growth include semiconductor-related companies such as MARUWA, a centuries-old specialist ceramics company which remoulded its business to produce crucial elements for semiconductors and circuit boards. He believes that the growth of electric vehicles, data centres, and 5G markets will bolster the company’s profit. He also invests in JP Mitsubishi Heavy Industries and JX Advanced Metals. Other holdings include inbound consumption-related companies such as Isetan Mitsukoshi.

SuMi TRUST also thinks that the J-Reit market has bottomed out and is positive about the construction sector, as well as banking. Saso is also optimistic about nuclear energy, which the Prime Minister is pushing. However, he remains underweight in automobiles after US President Donald Trump imposed 25 per cent tariffs on automobile imports to the US.

“We currently believe this is one of the most exciting periods to be an investor in Japan,” Katsunori Ogawa, senior portfolio manager of the Sakigake High Alpha Strategy, said. “The Japanese stock market is back on its feet and the return of inflation will bring with it profound shifts in market leadership.”

The Sakigake High Alpha Strategy, which is available to Japanese investors, aims to invest in Japanese growth names. The strategy is also available to European and UK investors through a UCITS vehicle.

Sumitomo Mitsui Trust Asset Management is a core asset management firm with Sumitomo Mitsui Trust Group (SuMi TRUST), one of the largest asset managers in Japan with $748 billion assets under management.