Macroeconomic reflation and AI boost the Japanese stock market - September 22, 2025

Combining technological strengths and macroeconomic reflation, the Japanese market offers opportunities. It plays a useful role in terms of international diversification.

Since 2022, Japan's monetary policy has differed radically from that of other developed countries. While in 2022-2023 the major central banks raised interest rates to combat post-Covid inflation, the Bank of Japan (BoJ) did not react (Chart 1). Instead, it seized this historic opportunity to encourage households and businesses to break with their deflationary habits.

This strategy is a continuation of the “revolution” initiated at the end of 2022 by Governor Kuroda and Prime Minister Abe. It appears to be bearing fruit, with an almost continuous rise in consumer prices, wages, and real estate prices since 2013 (Chart 2). This structural rise in inflation has not been without some pain, particularly in terms of consumer confidence. However, wages are rising slightly faster than prices, which is helping to protect growth.

With reflation now confirmed, the BoJ has begun to cautiously normalize its policy. Its interest rates have risen from -0.1% to +0.5% since spring 2024, and it has allowed long-term rates to rise significantly—to 1.6% on 10-year bonds and even more than 3% on 30-year bonds. These developments have led to a sharp recovery in the profitability of financial companies, particularly banks (Chart 3). The financial sector accounts for just over 16% of the MSCI Japan's market capitalization.

Like the ECB, but much more slowly, the Bank of Japan is reducing its footprint on Japanese finance. The latest step: on September 19, 2025, it announced that it would sell off its stock portfolio at a rate of ¥620 billion per year, less than one-thousandth of total market capitalization.

Faced with this cautious withdrawal, the Japanese stock market will have to rely increasingly on its fundamentals. Japanese listed companies are less profitable than their counterparts in other developed countries, with an average return on equity of 9%, compared with 11% in Europe and 15% in the United States. However, several positive trends are underway. Firstly, for several years now, there has been greater consideration for the interests of minority shareholders, with regular dividend increases and share buybacks. Secondly, as we have seen, financial stocks are benefiting from reflation. Finally, the Japanese market is rich in technology companies (15% of the MSCI Japan index, twice the European market), many of which are involved in one way or another in the global artificial intelligence value chain.
These two themes – financials and AI stocks – are significantly outperforming the stock market this year (Chart 4). In our international portfolios, we have included Japanese stocks in our “AI” basket since early 2024 and in our financial basket since August 2024. Our exposure to Japan is 80% hedged against currency risk.