The past quarter (January to March) saw a more uncertain backdrop for global markets, with geopolitical tensions and interest rate expectations both in focus. Rising tensions between the US and Iran added new risk, with potential knock-on effects for energy prices, inflation and global growth.
This matters for Japan. As a major importer of oil and gas, higher energy prices could push inflation up further and put pressure on consumers and businesses.
This article isn’t personal advice. All investments can fall as well as rise in value, so you could get back less than you invest. If you're unsure whether an investment is right for you, seek financial advice.
What’s the economic outlook for Japan?
The impact on the Japanese yen is more mixed. Geopolitical uncertainty can support demand for so-called ‘safe haven’ currencies like the yen, while higher import costs can weaken it. A weaker yen tends to benefit exporters but raises costs for domestic firms.
Monetary policy is another key area to watch. The Bank of Japan (BoJ) left interest rates unchanged at 0.75% in March, its highest level since 1995. This pause followed a similar move by the US Federal Reserve.
While the BoJ has signalled that further rate increases are possible, ongoing uncertainty – particularly around the Middle East – may lead policymakers to wait for clearer signals before further rises.
Japan’s economy has been recovering moderately, but the outlook, like most economies globally, remains uncertain. Policymakers are closely monitoring geopolitical risks and energy markets, which could influence both growth and inflation. Inflation is expected to temporarily dip below 2% before potentially rising again, partly driven by higher oil prices.
Strengthening wage growth also suggests Japan might continue to move away from its long period of low inflation. If sustained, this could support consumption and corporate earnings over time.
Elsewhere, continued reforms led by the Tokyo Stock Exchange are encouraging better corporate governance and capital efficiency from companies, which could support shareholder returns over the long term.
Prime Minister Sanae Takaichi is also keen to accelerate reform. For example, she’s encouraging companies to use large cash balances to increase wages and reinvest back into their businesses.
While risks remain, particularly around geopolitics and inflation, improving domestic conditions and ongoing reforms could continue to support Japanese markets.
How have Japanese stock markets performed?
Over the quarter, from the end of 2025 to the end of March 2026, the Japanese stock market as measured by the MSCI Japan Index grew 3.39%*. This masks a period of volatility though with the market performing strongly in February before falling back when the US and Iran conflict escalated in March. Remember this is a short time frame, and past performance isn’t a guide to future returns.
Over the year to the end of March, the market grew 23.21%. This is a strong return for any stock market over a one-year period and Japan has benefited from renewed investor interest away from markets like the US as well as a pickup in inflation.
Since our last review, value companies continued to outperform growth companies. Over the year, the MSCI Japan Value Index grew 29.25%, while the MSCI Japan Growth Index grew 17.12%.
Investors have recently favoured more economically sensitive sectors like financials and energy, while more growth-oriented areas, including artificial intelligence (AI) related companies, have been weaker. Software in particular has come under pressure as developments in AI raise questions about the durability of existing business models. While AI presents long-term opportunities, the pace and scale of disruption remain uncertain, weighing on sentiment.
31/03/2021 To 31/03/2022 | 31/03/2022 To 31/03/2023 | 31/03/2023 To 31/03/2024 | 31/03/2024 To 31/03/2025 | 31/03/2025 To 31/03/2026 | |
|---|---|---|---|---|---|
MSCI Japan Growth | -7.64% | -1.86% | 14.48% | -9.64% | 17.12% |
MSCI Japan Value | 3.77% | 3.48% | 32.01% | 1.18% | 29.25% |
MSCI Japan | -2.00% | 0.92% | 23.11% | -4.19% | 23.21% |
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.
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.
For more detail on each fund, it's charges and specific risks, please see the links to their factsheets and key investor information below.
The Man Japan CoreAlpha fund grew 30.97%* over the year to the end of March 2026. It performed better than both the stock market and average fund in the IA Japan sector, though past performance isn't a guide to future returns.
The fund’s value investing style helped over the year. The managers’ stock selection – their ability to pick and invest in companies that perform well regardless of their style or in which sector they’re classified – was also positive and helped performance.
The fund invests in a relatively small number of companies, which means each one can have a meaningful impact on performance, but increases risk.
Investors should remember though that different investment styles will come in and out of favour, so there will be times when the fund won’t perform as well.
The Baillie Gifford Japanese fund didn’t perform as well over the year, though it grew 7.52%. Its growth investment style held back performance compared with value-focused peers.
The fund invests less in what the managers see as shorter-term beneficiaries of Japan’s improved economic backdrop, and more in companies they believe have better longer-term earnings growth potential. This includes AI-related business Softbank, ecommerce company Rakuten and recruitment business Recruit. These have been weaker recently, but the managers remain positive about their long-term potential.
Given the different investment styles, we expect the Baillie Gifford and Man funds to perform well at different times. The Baillie Gifford fund also offers diversification by investing in some medium-sized businesses, which could offer longer-term growth potential, but smaller businesses are higher risk.
The funds could be held together in a broader investment portfolio to increase diversification, or one could diversify a portfolio that’s already biased towards a particular style.
Annual percentage growth
31/03/2021 To 31/03/2022 | 31/03/2022 To 31/03/2023 | 31/03/2023 To 31/03/2024 | 31/03/2024 To 31/03/2025 | 31/03/2025 To 31/03/2026 | |
|---|---|---|---|---|---|
IA Japan | -3.60% | 1.02% | 20.32% | -1.49% | 23.77% |
Baillie Gifford Japanese | -8.52% | -5.44% | 8.35% | -2.30% | 7.52% |
Man Japan CoreAlpha | 8.66% | 11.13% | 27.92% | -0.60% | 30.97% |