Why invest in Japan – economic reforms, inflation and market opportunities

From inflation to the currency, Japan’s economy has received plenty of attention recently. We’re looking at what’s going on beyond the headlines and, crucially, what it means for investors.

This article isn’t personal advice. All investments and any income from them can rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. If you’re not sure an investment is right for you, ask for financial advice.

Economic reforms

Political uncertainty rarely creates a positive economic environment and there’s been plenty in Japan in recent years.

Speaking to a Japanese fund manager back in October 2025, they said it would be interesting to see if the newly appointed prime minister, Sanae Takaichi, could last six months. None of her three predecessors had gone beyond three-years and her Liberal Democrat Party didn’t command a parliamentary majority.

Much has changed as we approach the one-year anniversary of Taikachi taking office. In February she called a snap election – securing a large majority in the lower house and opening a path to implement some of her promised economic reforms.

One of Takaichi’s signature election policies was to prioritise Japan’s economic security by investing in strategic industries like technology, artificial intelligence (AI), and defence. Her long-term investment plans were unveiled in June and involve investing ¥370tn (around £1.7tn) by 2040, across 17 areas of focus.

For one of the most indebted countries in the world, investment on that scale is bold. The ambitious plans are long-term, so it will likely take time for the economic effects to be felt.

Is inflation a concern?

Inflation returned to Japan in 2022 after years of static or falling prices.

For domestic consumers not used to price rises, this has felt uncomfortable. For businesses however, moderate inflation can make it easier to invest for the future.

Consumers are also more likely to spend now rather than hold off purchases, with higher demand fuelling higher sales. Investors took notice of this positive environment. After years of underperformance, the Japanese stock market has largely kept pace with global peers recently.

Like many other countries, Japan is affected by events in the Middle East and inflation is being pushed up by higher energy costs. Inflation is on the rise again having eased at the start of this year, following a period of being above the Bank of Japan’s (BoJ) 2% target from 2023-2025.

The BoJ moved to combat inflation by raising interest rates in September, following similar moves by the US Federal Reserve and the European Central Bank. This was the second increase of the year and takes interest rates to the highest level since 1995.

Currency woes

A sustained period of high inflation could make Japan a less attractive investment environment. The Yen has been under pressure as a result, reaching a 40-year low in July.

The government’s plans to invest vast sums of money in the coming years have led some investors to believe inflation might continue to rise, while the BoJ has said it’s mindful about increasing interest rates too quickly, leaving some market participants uncertain about what might come next.

US inflation expectations have also had an impact, and the dollar has strengthened with an increase in US interest rates. This can often come at the expense of other traditionally ‘safe haven’ currencies like the Yen.

The BoJ has been actively trying to strengthen the currency, even receiving assistance from the US Treasury Department, which is concerned about the effects a weaker Yen could have on global markets. Higher interest rates would usually be positive for a country’s currency but that isn’t playing out at the moment.

Currency markets are complex, with multiple factors contributing to investors’ views.

What does this mean for investors?

Despite higher borrowing costs for companies and uncertainty over inflation, there’s plenty to get excited about in Japan right now.

Companies operating in the strategic industries identified in Takaichi’s investment plan could see strong growth as spending begins. If moderate inflation persists, businesses with high market share and strong brands might exercise their pricing power by passing higher costs onto customers, potentially leading to increased revenue.

Higher interest rates are typically positive for banks, which could increase their margin on lending versus borrowing. A weaker currency is good for exporters but bad for importers, so if the Yen remains weak, companies which sell overseas could do well. However, for a country that imports much of its food and energy, it could present greater problems.

In addition to more recent factors, ongoing corporate governance reforms remain a key longer-term trend.

For example, companies holding large amounts of cash are buying back shares at an increasing rate. This is part of a wider shift towards encouraging companies to create meaningful long-term value for shareholders.

While there are plenty of positives for Japan, there are still plenty of risks. For now, the government needs to focus on delivering its ambitious spending plans without letting inflation get too hot.

Two fund ideas for Japanese exposure

Our Wealth Shortlist contains two actively managed Japan funds, each with a distinct investment style.

Investing in these funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest and make sure any new investment forms part of a long-term diversified portfolio.

For more detail on each fund, it's charges, and specific risks, please see the links to their factsheets and key investor information below.