The outcome of the Iranian conflict is likely to be messy and long drawn out, so let me concentrate on how to invest amid the turbulence.
What caused the Nikkei recovery?
The rally from 2023 into 2026 has been fuelled not only by a revival in the Japanese corporate confidence but also by an awakening by global investors that Japan has too cheap a yen, very undervalued companies and growing awareness by the corporate sector that they have excellent technology but did not get their shareholder value and corporate governance story in place.
The US-China rivalry showed Americans that their Japanese ally actually has a very strong manufacturing base, especially in semiconductors and defence equipment, thanks to an exceptionally cheap yen.
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American vulture funds started pushing sleepy Japanese conglomerates to reduce their notoriously high cash piles, improve their governance towards shareholder value and increase their dividend payouts.
After Warren Buffett signalled that Japanese stocks are undervalued, the combination of Japanese corporate share buybacks and foreign institutional investors seeking alternatives to the overvalued US stock market pushed the market upwards.
The real trigger to the stock market was the exceptionally weak yen. Japan is the world’s largest saving economy, with net foreign assets of more than US$3.5 trillion ($4.5 trillion), mostly in dollars.
See also: Japan’s investment targets include AI, quantum computing
However, as inflation began to creep back above 3% (currently down to 2%), the Bank of Japan began hiking interest rates, sparking fears of foreign-exchange losses on Japan’s overseas holdings.
With US stock and bond markets at record highs due to excessive debt growth and loose monetary and fiscal policy, Japanese institutional and corporate treasurers realised that they had to bring their cash home.
The cheap yen policy created an export boom for Japan’s giants like Toyota, Sony and Canon, but if they convert their dollars into yen, the only viable market to absorb those funds is the equity market. This is because the real estate market is still down due to the ageing population and bond prices are still high due to low bond rates.
Thus, the major corporations engaged in massive share buybacks and the insurance and pension funds piled back into stock markets. It was not just the trading houses and export giants that embarked on massive trillion-yen buybacks in 2024; insurance companies also responded to regulatory pressure to unwind their cross-shareholdings to return cash to their own shareholders. This corporate unwinding is finally enabling Japanese companies to exit their “fortress groupings” (keiretsu) and become more diverse, specialised companies with greater autonomy in delivering shareholder value.
What is surprising is that approximately 53% of the Nikkei index is weighted towards Japanese technology and consumer goods, compared with the Dow Jones, which has a more traditional balance of financials, healthcare and industrials. Indeed, compared with the Nasdaq 100 and Magnificent 7 (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla), the Nikkei 225 hasn’t done badly, especially since 2025.
Since the start of the year, the Nikkei delivered 16.6%, compared with –2.1% for the Nasdaq 100 and –5% to +2% for the Magnificent 7. Goldman Sachs has coined a Samurai 7 for Japanese tech stars, such as Advantest, delivering ~85% (2025) and outperforming Nvidia (+20% in 2025). Mitsubishi Heavy delivered ~75% in 2025 and outperformed Tesla and Apple, mainly on the back of not just tech capability but also defence contract capability.
While the Mag 7 focus on AI software and chips (Nvidia and Microsoft), Japanese tech leaders dominate the high-end hardware and testing infrastructure.
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For example, Tokyo Electron is the world’s leading supplier of chip-making tools (etching and deposition) and benefits tremendously from the global push for domestic chip manufacturing in the US, Europe and Japan. Japanese stocks are also benefiting from valuation catch-up, trading at a significant discount to their US peers.
In short, Japan is no longer just a “value play” — it is now the global leader for growth diversification away from high US tech stock valuations and dollar concentration in portfolios.
How do the Iran war and energy prices impact the Japanese stock market?
In the short run, higher energy prices will feed into higher inflation, possibly trigger interest rate increases, and therefore slow global growth. The Arab Gulf region holds 48% of global proven oil reserves and 40% of global proven natural gas reserves. Capital will begin to diversify out of the Middle East due to heightened military risks, benefiting East Asia.
Much will depend on whether the advanced central banks will raise interest rates to temper inflation. My guess is that quantitative easing is on the cards, as the advanced economies cannot afford high real interest rates that would exacerbate their unsustainable fiscal debts. The IMF estimated that US net interest payments climbed above 2% of gross domestic product before the pandemic to 4.2% in 2025 — surpassing defence spending. With advanced countries focusing on increased defence expenditure amid rising global conflict, the fiscal and debt outlook is bleak, but short-term growth will be bolstered by defence spending. The two real downsides are growing inequality, which would create more domestic unrest and cross-border conflict, and the threat of financial crises from overstretched finances.
Japan has a hawkish prime minister (and finance minister) who wants to see a Japanese renaissance from decades of stagnation. Japanese businessmen are seeing opportunities to improve their balance sheets through investment in innovation and technology. Barring major conflicts in Northeast Asia (for example, the Taiwan Strait), the Japanese market seems to offer good tech exposure, low costs due to the cheap yen, and a stable governance environment. For those who do not wish to be caught between the US and China markets, or an uncertain Europe, Japan is a good compromise hedge.
As always, knowing what you are buying is key to success.
Andrew Sheng writes on global issues from an Asian perspective
