The Japanese market rose steadily during the year to the end of September 2026 and comfortably outperformed the broader global stock market, as measured by the MSCI World index – this is made up of mostly US companies but also includes Japan and 21 other developed markets.
This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. Investments and any income they produce can fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to future returns.
Market leadership
The market’s gains were led by two themes.
First, Japan is home to technology companies that have seen increased demand due to ongoing artificial intelligence (AI) excitement.
The second topic is interest rates. After years of negative rates, the Bank of Japan has steadily raised rates over the past couple of years. Higher rates are typically beneficial for banks, as it can increase profits.
As a result, the financials and technology sectors were responsible for nearly two-thirds of stock market growth even though they make up just over a third of the market. Banks and semiconductors contributed more than 40% of growth, despite being less than 20% of the market.
From a style perspective, value performed better than growth despite a slower start. Value has been the dominant style for several years now, but this won’t always be the case. Smaller companies also performed well but were slightly weaker than larger, more established companies.
September 2021 to September 2022 | September 2022 to September 2023 | September 2023 to September 2024 | September 2024 to September 2025 | September 2025 to September 2026 | |
|---|---|---|---|---|---|
MSCI Japan | -14.26% | 15.60% | 10.99% | 16.36% | 28.75% |
MSCI Japan Growth | -22.03% | 6.23% | 12.93% | 9.01% | 24.13% |
MSCI Japan Value | -6.16% | 24.92% | 9.48% | 23.94% | 33.35% |
MSCI Japan Small Cap | -12.14% | 8.47% | 8.93% | 19.87% | 25.31% |
How have Japan funds performed?
The average fund in the IA Japan sector returned 27.3% during the past 12 months. This is slightly behind the MSCI Japan index and, although it’s still a strong return for investors, it reflects some difficult conditions faced by fund managers, especially if they don’t tend to invest as much in the few areas of the market that performed well.
Our two actively managed funds on the Wealth Shortlist enjoyed different outcomes. We expect this, as the two funds use different, and complementary, investment styles.
Man Japan CoreAlpha returned 35.4%, delivering strong outperformance. The fund uses a value investment style, where lead manager Jeff Atherton and his team look for companies that are currently unloved by other investors and aim to buy shares for less than what they believe is their true worth. This style of investing has been in favour, which aided performance.
Investments in financials also contributed. The team recently reduced investments in banks. This is in line with their contrarian approach, taking profits from companies that have performed well and investing in those that haven’t done as well but could rebound.
Baillie Gifford Japanese didn’t perform as well, but returns of 19.4% were still positive for investors. A focus on companies that may grow their earnings further in the future was a headwind. The fund also invests less in financials than the broader market does. From a technology perspective, the managers favour software-related businesses more than the hardware companies that dominated the market.
Importantly, the use of different styles means that we expect the funds to perform better at different times but we also believe that they both have the potential to outperform the market over the long run.
September 2021 to September 2022 | September 2022 to September 2023 | September 2023 to September 2024 | September 2024 to September 2025 | September 2025 to September 2026 | |
|---|---|---|---|---|---|
Man Japan CoreAlpha | 0.61% | 25.83% | 6.34% | 24.06% | 35.35% |
Baillie Gifford Japanese | -19.34% | 0.63% | 10.77% | 16.18% | 19.36% |
IA Japan | -15.82% | 11.63% | 11.21% | 15.91% | 27.30% |
Where could the Japanese stock market go from here?
Despite recent strong performance, Japanese companies remain cheaper than other developed markets on a price-to-earnings basis. This means that investors don’t have to pay as much for a company’s shares compared with the revenue it earns.
Japan is also in a period of economic transition, moving from an economy suffering from deflation to one with moderate inflation. This is supported by ambitious long-term investment plans that the government hopes will provide future economic resilience.
Corporate governance reforms continue, as the government aims to make the country more attractive to investors. Japanese companies have typically held onto large amounts of cash rather than returning it to shareholders through dividends or by buying back shares. In future, boards may have to justify why they continue to hold so much cash.
Share buybacks have also already increased and were more than 30% higher in the first part of 2026 than the previous year. This is mostly from unwinding cross-holdings – where companies own the shares of other companies. The number of independent directors on the boards of Japanese companies has also risen dramatically, giving shareholders a greater voice.
In combination, these factors could help support the share prices of companies making improvements over the longer term, though there are no guarantees.
What do rising bond yields in Japan mean for investors?
A bond yield is the return that investors get for lending money to a government or company. For years, Japanese government bonds paid next to nothing because interest rates were so low. As the Bank of Japan has raised rates, bond yields have risen, too.
Japanese savers and investors used to have little choice but to turn to the stock market for the potential of a decent return. Bonds are now a more realistic alternative.
Rising yields also affect companies directly.
Many borrow to invest and grow their businesses, and higher yields make that borrowing more expensive. Companies with lots of debt could see their profits squeezed if they need to refinance at higher rates, and they may have to be more selective about which projects they take on. Companies with strong balance sheets, meaning plenty of cash and not much debt, could be better placed and more attractive to investors.
Bond yields can also influence the yen, and this matters for UK investors. If Japanese yields keep rising and become more attractive than those elsewhere, overseas investors might buy more Japanese bonds, which would typically support the yen.
A stronger yen could help Japanese companies that sell mainly to customers at home or that import materials for manufacturing. Exporters that earn a lot overseas could see their profits fall when those earnings are converted back into yen. Currency markets are complex, though, and many other factors can affect them.