Japan sector review – 2025’s stock market performance and what might lie ahead

It was an eventful year for global markets.

For Japan, its stock market ended strong. The TOPIX, Japan’s main stock market, reached a new all-time high during December. By the end of the year the MSCI Japan Index had grown 16.02%.

But what story did the previous 11 months tell us, and what might the future hold?

We’re delving into last year’s performance, the latest on interest rates, and consider the effects February’s snap general election may have.

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.

Rising interest rates

In December, the Bank of Japan (BoJ) raised interest rates to 0.75% (from 0.50%) – the highest level since 1995. The move was widely anticipated following comments earlier in the month from the BoJ’s Governor Kazuo Ueda, and so markets took it largely in their stride.

While rates were held steady in January, comments from the BoJ suggest an upward trajectory, with the pause in hiking linked to February’s upcoming snap election.

Bond yields rose and a snap election called

Prime Minister Sanae Takaichi recently announced her decision to dissolve parliament and call a snap general election on 8 February. The move came just three months into her premiership, following a run of opinion polls showing strong personal approval ratings.

Takaichi is framing the election as a chance to secure a clear mandate for major policy change and is keen for her leadership to secure broader public backing.

The Prime Minister has already pledged new stimulus to support economic growth, alongside plans to curb the country’s debt and strengthen the country’s military and defence.

She’s also considering a two-year suspension of the 8% sales tax on food. This may provide a lift to consumers and growth overall, but the prospect of such a move leading to increased borrowing has pushed government bond yields to multi-decade highs as it could add to Japan’s already heavy debt burden.

Japan’s currency, the yen, briefly weakened following the election call. This follows an ongoing period of weakness for the currency, which recently fell to its weakest level against the US dollar in 18 months. While a weaker currency is good for exporters, it’s more of an issue for importers and domestic manufacturers.

Government policy focused on growth and a weakening currency – both could apply upward pressure on inflation.

What this means for investors

The election outcome could be a key driver for Japanese markets in early 2026, with political noise often creating short-term volatility.

A decisive win could give Takaichi more freedom to pursue stimulus, deregulation and structural reforms. Such actions could support corporate earnings and have a positive knock-on effect to the stock markets. However, if her policies prompt investors to question her fiscal discipline it might increase pressure on bond markets and the yen.

Other long-term themes remain intact. Corporate governance continues to improve, and many Japanese companies are still at an early stage of reform. While risks around debt, inflation and geopolitics remain, a combination of political change and structural progress could prove beneficial.

How have Japanese stock markets performed over the year?

Over the year to the end of December 2025, the MSCI Japan Index rose 16.02%*.

Like many global stock markets, Japan saw a sharp dip in April 2025 following US President Trump’s tariff announcements on the nation’s so-called ‘Liberation Day’. However, the market rebounded and continued to grow through the rest of the year. As always, past performance isn’t a guide to future returns.

This growth saw Japan performing better than the broader global stock market, which grew 13.91%, over the same period.

Since our last review, value companies – those whose share prices may be viewed as undervalued or are recovering from a weaker period – continue to outperform growth companies, which are typically associated with more consistent earnings.

Over the year, the MSCI Japan Value Index grew 22.91%, while the MSCI Japan Growth Index grew 9.16%.

Among value sectors, financials and industrials performed well, while consumer-related businesses lagged, hurt by rising inflation and higher prices.

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 of either “growth” or “value” investing, and these styles tend to dominate market performance at different times. When a rotation in style occurs – that is, when one category becomes favoured over another – it can impact performance.

Over the last year, value companies have outperformed growth. But 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 funds’ objectives align with their own and they understand the specific risks of the fund before they invest.