Global allocators are looking at Japan again

Japan is no longer the market investors once dismissed for negligible yields and an overvalued currency. Both domestic and global allocators are shifting capital into Japanese equities, debt and AI-related sectors, rethinking the country's role in their portfolios.

“The yen is cheap, 10‑year JGBs [Japanese government bonds] yield around 3% and hedging back into dollars offers a premium. Japanese equities have outperformed the S&P over the past two years, which has caught investors’ attention,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management. “The conversation has moved from ‘why own Japan?’ to ‘how much Japan should we own across the portfolio?’”

Economic and political changes are prompting investors to revisit a market many had underweighted for long.

The end of negative interest rates, improving wage growth, corporate governance reforms and equity outperformance have strengthened the investment case across asset classes. At the same time, investors see opportunities in a still-weak yen and higher Japanese bond yields, although concerns remain over fiscal sustainability and the pace of monetary tightening.

The BOJ's September rate hike underscored this change. According to Loo, that decision reflected both improving domestic economic conditions and growing external pressure for Japan to move away from ultra-accommodative monetary settings.

Loo also pointed to Japan's investments in key industries such as semiconductors, rare earths and energy infrastructure, which are deepening ties with the US and positioning Japan within global AI supply chains.

JGBs VS US TREASURIES

The shift in sentiment is increasingly visible in asset allocation decisions. Norges Bank has trimmed US Treasuries, with its investment arm recommending a cut to 50% from 70%, in favour of JGBs. That translates into nearly $80 billion less in US Treasuries, according to Reuters calculations.

Net foreign institutional inflows into Japan stood at JPY9.7 trillion (about $60 billion) in the first half of 2026, which is around four times as much as the same period in 2025.

Corporate governance reforms remain a major attraction for overseas investors, with share buybacks, dividend payouts and efforts to improve return on equity on the rise. Corporate profits also remain near record levels.

Loo added that foreign investors more broadly have been consistently buying Japanese debt since late last year, attracted by yields and the hedging premium.

Australian Retirement Trust, meanwhile, is building its biggest overweight position in years, while trimming US dollar exposure, convinced markets are underestimating the BOJ’s willingness to raise rates. The fund sees fair value for USD/JPY around 150, with potential for the yen to strengthen into the high 140s.

Beyond the macro story, investors are finding opportunities in sectors that stand to benefit directly from a higher-rate environment. Japanese banks are benefiting from higher base rates and expanding net interest margins while equities are more investable, supported by wage growth and inflation absent for decades.

Middle Eastern sovereign wealth funds are also moving into Japan, drawn by cheap valuations and long‑term strategic opportunities. In August, a UAE fund considered a $6.3 billion AI data-centre investment in the country. 

FISCAL EXPANSION AND CURRENCY RISKS

However, not all investors are convinced that Japan's revival is without risks. John Livanas, CEO at State Super, cautioned that fiscal policy is a key driver of yen weakness. Prime Minister Sanae Takaichi’s mix of higher spending, tax relief and fiscal stimulus is supporting growth and equities but raising sustainability concerns given debt of around 250% of GDP.

Rising long‑end JGB yields – with 10-year yields recently marking a three-decade high – reflect investor unease, while inflation remains elevated due to food, energy and import costs. Political pressure still favours yield control and accommodative policy over aggressive tightening.

“The market may still be underestimating the amount of tightening needed to support the yen,” warned Livanas. “While around three BOJ hikes are priced by mid‑2027, USD/JPY remains near 160. Domestic inflation pressures and external pressure from the US could eventually lead to faster policy normalisation than currently expected.”

He added that the structural case for a stronger yen is hard to identify, with wide rate differentials, fiscal concerns, energy import dependence and tolerance for above‑target inflation weighing on the currency. Since mid‑2025, he observed, USD/JPY has become less sensitive to rate differentials, suggesting fiscal and political considerations are increasingly driving the currency.

The picture that emerges is that Japan has become investable again after decades in which investors largely ignored it. Across markets and asset classes, opportunities are being created even as macro risks persist.