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Mild inflation alongside gradual monetary normalisation should drive improvements in Japan’s corporate earnings in the new year.

Wage gains and price pass-throughs, as well as the proactive fiscal stance of the new Takaichi cabinet, will help boost domestic demand even as uncertainties in external demand remain. Meanwhile, with a nudge from the Tokyo Stock Exchange, Japanese companies will continue to enhance their capital efficiency through higher payouts and investments, while also reassessing unprofitable legacy operations.

Specific sectors I’m looking at closely for the year ahead include financials, construction, industrials, IT, and engineering companies.

Japan’s bank stocks have been overlooked for years because of their inefficient capital allocation and the country’s ultra-low-interest rate environment. But there’s exciting potential here now that things have turned around. Not only are they benefiting from rate rises by the Bank of Japan, but they’re also stepping up dividend payments, share buybacks, and cutting back on cross-shareholdings.

It’s a similar comeback story for construction companies. With modest inflation, Japanese companies have ramped up investment in research and development, M&A, and productive capex, instead of hoarding cash. Robust capex is driving an increase in demand for construction. Contractors have regained pricing power, which will continue to drive margin expansion independent of global macro developments.

Industrials, engineering, and IT companies will benefit from domestic digitalisation and the energy transition. Japan is aggressively pursuing digitalisation as artificial intelligence becomes a central force for growth and innovation. The country’s ageing and shrinking workforce is accelerating the corporate adoption of AI. Major firms are investing in both AI and automation technologies to boost productivity and offset the demographic trend.

There are some interesting ideas across Japanese exporters too, in particular those supplying the US with hardware for its mass build-out of datacentres and the equipment needed for its related grid upgrades.

Risks from US trade policy, the global interest rate path, and domestic politics could trigger pauses after a strong rally. Even so, from governance reforms to the return to mild inflation, a confluence of catalysts makes Japan a compelling hunting ground for active managers in 2026.

Min Zeng

Min Zeng

Portfolio Manager