Naomi Fink
The narrative of “American Exceptionalism” only recently dominated financial markets. Since then, uncertainty over U.S. foreign trade, fiscal policy and geopolitical actions has thrown into doubt the thesis that American companies must rationally dominate global portfolios and relegate the rest of the world’s stock markets to the investment sidelines.
Still, the concentration of lofty-valued technology firms in U.S. indexes persists. Although technology investment is likely to boost productivity, the timing remains uncertain. In the interim, U.S. institutional investors could benefit from diversifying into reliable sources of growth not immediately correlated to the domestic business cycle.
In aggregate, Japan is not immune to market volatility, as evidenced by the swings that occurred relative to the April 2025 U.S. tariff announcements. However, there are sound reasons why this volatility creates opportunities for long-term investors to buy Japanese assets at favorable levels, hold them patiently through the interim swings, and realize the value that Japan’s structural recovery will offer.
Catalysts Driving Japanese Equities
The recovery underway in Japan is on solid footing. Pressures on domestic consumption in 2025 were eased by temporary policy initiatives such as subsidies for utility bills, tuition support for high school students and the release of rice stockpiles, all designed to help ease the impact of higher costs of living and further boost consumption. Additional short-term measures are anticipated from Prime Minister Sanae Takaichi, who took office in October 2025 and has pledged “responsible yet proactive” fiscal policy. The rest remains in the hands of Japan’s central bank, which is anticipated to continue gradually raising rates. The country’s full-year 2025 real GDP growth is estimated at 1.1%, well above the Bank of Japan’s potential growth estimate of 0.5%.
Against this backdrop, many undervalued Japanese companies are poised to improve capital efficiency. On average, Japanese companies hold more cash than their U.S. or European counterparts. This is a byproduct of the deflationary “lost decades” that affected the country from 1990 to the 2010s.
In 2023, the Tokyo Stock Exchange enacted a “carrot and stick” approach to underperforming companies to encourage them to put their cash to use, and shareholders are starting to benefit. The resulting increase in expenditures on both physical and human capital has helped companies with cash surpluses navigate the labor shortage, moving those employers toward real wage growth and increasing consumption—a virtuous circle. With ongoing inflation, companies have incentives to keep margins competitive not only by upgrading depreciated physical capital, but also to bolster future productivity via digitization and other labor-saving technologies. In addition to creating demand for new componentry, the Japanese government anticipates that new artificial intelligence data centers will keep energy demand on an expansion path for years despite Japan’s aging demographic.
Another beneficiary of Japan’s structural recovery is the technology services sector. While domestic firms upgrading software are large customers of U.S. software firms (Japan’s “digital deficit”), the upgrades often require homegrown technology services to customize the software’s deployment, providing a lift to Japan’s technology services sector.
Some companies are taking another approach, returning their excess cash to shareholders through dividend payouts and share buybacks, and others are using their strong balance sheets to seek new acquisition targets.
Another development stemming from Japan’s emergence from deflation is that corporate Japan is not the only economic sector with cash surpluses. Japanese households have started reallocating their built-up balance sheet cash, totaling more than 1.1 quadrillion yen ($6.907 trillion).
With inflation starting to erode consumers’ purchasing power, households have clear incentives to seek value in positive-yielding assets.
Uncovering Opportunities
Higher volatility and reversals of market-supportive policies will not impact companies equally. Hence, passive strategies may not be the optimal vehicle to take advantage of the productivity gains that accrue to those firms that invest and allocate capital and labor wisely. However, skilled portfolio managers have an opportunity to identify future value and generate excess returns.
With the Nikkei Stock Average near all-time highs, correctly identifying firms acting on the Tokyo Stock Exchange guidelines and improving governance and profitability is critical to creating and maintaining a portfolio positioned to benefit from Japan’s structural recovery. In a market where approximately half (47%) of the firms in the TOPIX index are not covered by sell-side analysts, the opportunity to identify mispriced securities is greater than in markets closely followed by analysts.
The contrast between the latent opportunities of undervalued Japanese firms and the flamboyant earnings of U.S. technology companies illustrates a clear opportunity for portfolio diversification, which, if not quite the only “free lunch” in finance, is almost certainly “protection against ignorance.”
Naomi Fink is the chief global strategist at Amova Asset Management.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.
Tags: Asset Allocation, diversification, Japanese Equities, opinion