In recent years, the Government of Japan and other institutions—such as the Tokyo Stock Exchange—have promoted reforms to increase transparency, strengthen accountability, and ensure greater independence on corporate boards. These changes best explain the rise in Japanese stock prices. The government’s plan is highly ambitious: it seeks to increase Japanese savers’ allocation to local equities, complemented by measures from the Tokyo Stock Exchange encouraging companies to reduce their high cash balances. The pandemic also marked a turning point in Japan’s departure from its long-standing deflationary environment.
In addition, in October, Sanae Takaichi became president of Japan and, with a distinctly pro-economy stance, aims to accelerate the transformation of corporate leadership structures within Japanese companies. From a more macroeconomic perspective, Japan’s exit from a deflationary environment is providing an “additional tailwind” for corporate earnings. Japanese consumption has spent several decades in a kind of desert, with confidence severely damaged by the deflationary spiral in which the country was trapped—one that affected corporate profits, employment, consumption, and ultimately prices. The composition of the index has also contributed to its appreciation, given its exposure to technology, semiconductors, and financial services, in line with broader global trends.
What do we expect for the Japanese economy and markets in 2026?
The latest GDP data showed a 1.8% contraction in activity in September, but a closer look at the underlying components reveals that both private consumption and investment proved resilient. Right now, Japan has a relatively solid base of domestic demand, and the government intends to build on this by deploying a new fiscal stimulus package. In other words, the sizeable package being proposed lays the groundwork for an economy that could, to some extent, overheat in 2026.
See also: Japan’s auto workers' union seeks higher wage gains as BOJ watches trends
The country's exit from deflation reflects this dynamic—in fact, the arrival of new measures aimed at containing inflation would only prolong those symptoms. The key will lie in the Bank of Japan’s ability to maintain a monetary stance finely calibrated enough to keep the economy in balance: to avoid discouraging consumption while at the same time preventing inflation from becoming entrenched and de-anchoring expectations.
It will be crucial to monitor how this interplay between activity and prices evolves, as well as the degree to which institutions tolerate movements in either indicator. Ultimately, fiscal and monetary policy are the fundamentals that sustain the credibility of the currency and, therefore, capital flows.
Javier de Berenguer is an investment manager and fund selector for MAPFRE Inversión and Eduardo García Castro is a senior economist at MAPFRE Economics.
