Tariffs peaking, but resilience shines through
Recent trade tensions, especially steep US tariffs on Japanese goods — 25% on automobiles and 24% on other exports — have clouded sentiment. However, Julius Baer estimates that the GDP impact will be modest, around 0.5 percentage points. Even so, its baseline scenario predicts Japanese GDP growing by 1.6% in 2025, a sharp increase from just 0.1% in 2024.
Japan’s resilience stems from its diplomatic agility and renewed focus on economic partnerships. Recently, Japan’s chief negotiator, Ryosei Akazawa, expressed optimism that a trade deal with the US could be struck as early as June 2025. As global trade frictions ebb, Japan’s stable geopolitical position relative to its peers is helping secure investor confidence and mitigate downside risk.
See also: Near-term upside for US and China, but long-term prospects remain uncertain
From deflation to sustainable growth
A defining shift in Japan’s economy is monetary. After decades of deflation, Japan has entered what economists describe as a virtuous cycle of sustainable inflation and wage growth. With wage hikes exceeding 5% in two consecutive years, companies now possess the pricing power to pass costs on to consumers without triggering a collapse in demand.
This change is more than superficial. It reflects a fundamental transformation in how the economy operates. Companies that were once squeezed by narrow margins are seeing real earnings leverage, while consumers, once cautious spenders, are increasingly confident.
A corporate reset
At the heart of the market resurgence is Japan’s evolving corporate behaviour. In FY2024, firms announced a record JPY18.7 trillion ($168 trillion) in share buybacks — up 85% year-on-year. More importantly, many of these companies have executed buybacks for three or more consecutive years, indicating a deeper cultural shift toward prioritising shareholder returns. Remarkably, even amid the spectre of a trade war and tariff uncertainties, the pace of share buybacks continued to pick up, reaching JPY3.8 trillion in April alone.
See also: US-China tariff rollback offers markets a surprise boost, but risks linger
Progress on corporate reform is accelerating. Many Japanese companies still hold meaningful cash reserves, suggesting that the strong trend of share buybacks and other corporate actions is likely to continue into 2025. Companies are unwinding cross-shareholdings, simplifying governance structures and improving capital allocation. Going forward, we expect initiatives such as buybacks, reduction in cross-shareholdings and other efforts to improve ROE to lead to better corporate profitability and valuations.
For years, Japan struggled with lower valuation multiples, but as reforms take hold and ROEs improve, investors are starting to re-rate the market.
Attractive market valuations
Despite these structural shifts, Japan remains one of the most undervalued markets globally. The Nikkei 225 trades at a P/E ratio of just 16 times, below its long-term average and at a 20% discount to the global index. The disconnect is striking, particularly given Japan’s superior earnings growth versus major stock markets.
Since 2012, Japanese equities have outperformed major global benchmarks on EPS CAGR — 10.5%, versus 7.2% for the S&P 500. Yet, foreign investors still hold historically low allocations to the market. The opportunity is clear: Japan offers growth at value prices in an era where both are scarce.
Do not ignore the risks
Still, no investment thesis is bulletproof. Japan’s demographic decline, labour shortages and low productivity growth remain structural headwinds. A tightening cycle by the Bank of Japan, however gradual, could test market sentiment. Additionally, for export-heavy sectors, a softening China or prolonged US trade friction could pose challenges.
Critically, these risks are widely recognised and arguably priced in. What markets may be underestimating is Japan’s capacity for self-correction, innovation and reform, particularly in sectors historically viewed as stagnant.
12-month outlook: quiet strength, not a passing trend
With low valuations, reforms gaining momentum and strengthening macro tailwinds, Japan is far more than just a tactical trade. Julius Baer’s 12-month target for the Nikkei 225 sits at 40,000, implying an 11% total return. For long-term investors, this is more than a catch-up rally; it marks the beginning of a multi-year re-rating.
Quality names with strong bottom-up drivers
Japan’s response to labour shortages — massive investment in automation, AI and IT — is generating a productivity renaissance. This is spurring a feedback loop where higher productivity leads to margin expansion, enabling further wage growth and reinvestment. It presents a compelling story for capital goods firms, automation providers and IT services players.
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Simultaneously, domestic consumption is back in focus. As wage growth stabilises and consumer confidence builds, sectors like retail, travel, consumer electronics and entertainment are showing meaningful upside. In this environment, “bottom-up” quality names with pricing power and brand strength are outperforming.
No better time than now
Japan stands as one of the few large economies combining macro stability, structural reform and attractive valuations. In a world of fragmented growth and high volatility, Japan offers something different: quiet, compounding strength.
Having a basket of high-quality Japanese companies is essential for a globally diversified equity portfolio, as it allows investors to navigate the current volatile market environment. Investors can access the Japanese market through selected multinational companies focused on consumer electronics or entertainment sectors, as well as global names in retail, hospitality, insurance, semiconductor and food and beverage sectors.
This is no longer a contrarian play; it is simply a smart investment strategy.
Louis Chua is an equity research analyst, Asia, at Julius Baer
