Japan funds review - new leader, new direction?

As I write, Japan’s political landscape has taken a turn. Sanae Takaichi, a conservative and long-time ally of the late Shinzo Abe (prime minister from 2012–2020), was elected leader of the ruling Liberal Democratic Party (LDP) on 4 October. Her appointment puts her on track to become Japan’s first female prime minister – a historic milestone with a range of potential implications for markets.

This article isn’t personal advice. If you're unsure whether an investment is right for you, seek financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.

The ‘Takaichi Trade’

The Nikkei 225 jumped nearly 5% after Takaichi’s win, led by shares in defence, semiconductor, and engineering companies. At the same time, the Japanese yen slumped against the US dollar. Investors are anticipating bold fiscal stimulus and continued loose monetary policy, reviving elements of ‘Abenomics’, the economic strategy associated with Abe’s time in office.

This market optimism has been dubbed the ‘Takaichi trade’ – investing based on renewed stimulus, structural reform, and deregulation. But it also brings the potential for increased volatility in Japan’s bond and currency markets.

What could change under Takaichi?

Takaichi has long supported policies aimed at stimulating inflation and economic growth, through tax cuts, higher government spending, and public investment in areas like defence and energy. If implemented, these measures could boost corporate earnings and support stock markets.

However, Japan is already one of the most indebted major economies, and investors are weighing the cost of further borrowing. Yields on 30-year Japanese government bonds rose, and prices fell, after the election, reflecting those concerns.

At the same time, there's been a rotation from ‘value’ to ‘growth’ companies, partly as Takaichi’s policies are perceived to be more growth orientated. Shares in the financials sector, which are typically in the value camp, lagged as the likelihood of near-term interest rate hikes faded. The likelihood of a rate rise this month is now below 50%. Value could outperform though if Takaichi’s preference for consolidation in some industries gains traction, as it could favour undervalued takeover candidates.

A weaker yen continues to benefit exporters but drives up the cost of imports. This presents a challenge for consumers already facing inflation, particularly higher food prices.

Geopolitical risks, in many forms, also loom in the background. For example, Takaichi’s nationalist leanings and pro-defence stance could strain relations with China or disrupt global supply chains.

While some see Takaichi’s election as the return of Abenomics, with a focus on structural reform and better governance, political hurdles remain. The LDP is divided, and Takaichi will likely need coalition partners to govern. This could limit the scale or pace of her reforms.

How have Japanese stock markets performed over the year?

Over the year to the end of September 2025, the MSCI Japan Index rose 16.36%*. Like many global stock markets, Japan saw a sharp dip in early April following US President Trump’s tariff announcements on so-called ‘Liberation Day’. However, the market rebounded and gained further after Japan reached a trade deal with the US in late July. As always, past performance isn’t a guide to future returns.

This growth means Japan has nearly caught up with the broader global stock market, which grew 17.38% over the same period.

Value companies, whose share prices may not fully reflect their potential, continued to outperform growth companies, which are typically expected to deliver more consistent earnings. Over the year, the MSCI Japan Value Index grew 23.94%, while the MSCI Japan Growth Index grew 9.01%.

Among value sectors, financials and automakers performed well, while consumer staples lagged, hurt by rising inflation and higher prices.

Takaichi’s election could mark the beginning of a new phase in Japan’s economic story, but challenges remain, not least needing to unite a party that has faced a turbulent few years. If she can execute her agenda, Japan’s stock market could benefit from improved productivity and further reform. If not, the “Takaichi trade” may be short-lived.

How have Wealth Shortlist funds performed?

Japan’s stock market is often style driven. This comes down to lots of Japanese companies showing traits and characteristics that define either growth or value investing. So, when a rotation in style occurs, it can impact performance. Over the last year, value companies have outperformed growth. Remember, fund managers with different strengths, styles and areas of focus will perform differently in different economic conditions.

For more details on each fund and its risks, use the links to their factsheets and key investor information below. Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own and they understand the specific risks of the fund before they invest.

Man Japan CoreAlpha

Baillie Gifford Japanese