Managing director explains why Japan may have shifted from a source of defence to a growth market
Every month at WP we go deep on a subject that matters to Canadian advisors. This May we’re exploring global markets.
Japan is on a run. The Nikkei 225 is up over 20 per cent year to date, up almost 66 per cent in the past year. That index has, since the middle of 2025, consistently exceeded records and now sits at roughly 150% of the price it reached in 1989, before the bubble burst and the country entered three decades of stagnation. It’s a run deeply tied into global macro themes and underpinned by structural shifts within Japan that should prompt advisors to start viewing the country a little differently.
Grace Su, is a Managing Director and Portfolio Manager, with ClearBridge Investments’ Global Value Equity team. She explained that Japan has been one of the best-positioned markets to benefit from the ongoing AI macro trend. The heavy weight towards value-oriented component manufacturers and exporters, viewed right now as the segment ‘winning’ the AI story, has powered this recent growth. She notes that the other macro overhang of conflict and energy prices has also been largely looked through by investors. Su explained that despite the run we’ve seen so far, there may still be upside for investors, especially as we start to think of Japan as an environment for growth.
“For the AI theme in particular, the market has started to bifurcate between winners and losers. The AI trade for the past few years was a rising tide that lifted all boats. Now I think the market is starting to look at the capex dollars and seeing that there are winners and losers and trying to bifurcate between those two. The initial reaction in that bifurcation has been that the picks and shovels are the winners,” Su says. “Japan, to their credit, has expertise in a lot of these more hardware related industries. So in the AI world, for example, Japan is much more focused on semiconductor production equipment. They are in components, they are in materials, anything from all of the laminates, gases, all of the little components that go into semiconductor manufacturing, they’re very strong in that. They are very strong in electrical equipment and machinery, they are very strong in cables. And so there are a lot of sectors that benefit from this picks and shovels trade that Japan is naturally strong at.”
In the past five months, that strength in components and manufacturing has been the core driver for Japanese stock performance. One of those months, however, saw Japan lag global markets significantly: March. In March, investors digested the impacts of the US-Israeli war with Iran and its subsequent supply shock for energy markets. East Asia imports the majority of its energy from the Middle East, with Japan bringing in 95 per cent of its oil through the Strait of Hormuz. Investors in March discounted Japanese stocks due to that supply shock, only to recognize a few realities.
Su explains that Japanese manufacturers have globalized their operations, taking advantage of other markets with lower input and labour costs. As well, Japan has some of the largest strategic oil and gas reserves in the region, allowing it to weather some of the worst of this shock. The demand for these AI components that has driven Japanese equities higher, too, has also given these manufacturers more pricing power, allowing them to pass through energy cost increases. Those factors allowed investors to look past the energy-related risks in Japanese stocks, though Su believes that there could be some more significant long-term risks associated with energy prices that aren’t fully priced in.
While the two global macro stories of 2026 have played out in Japanese equities, the national narrative of reflation, wage growth, and renewed consumer power has continued in some form. Su notes that the upcoming spring wage negotiations with the country’s trade unions should see wages rise by about five per cent, after they were kept flat by the late Prime Minister Shinzo Abe’s policy of encouraging more labour force participation by women and older people. With wage growth and increased purchasing power comes inflation, what feels new to a country that’s gone through three decades with very little inflation. At the same time, however, Su believes there is going to be some consolidation in consumer-facing sectors in Japan, which had focused more on service quality and convenience over profitability. Those sectors now serve an old population with many retirees on a fixed income being squeezed by inflation.
The political solution to the return of inflation has been growth. Prime Minister Sanae Takaichi recently won a strong mandate with pro-growth policies. She represents something of a departure from governments focused on deflation and global investors have greeted this shift warmly.
For all the reasons investors may be keen on Japan now, Su notes that there are risks to the current growth thesis. Aside from the energy issue, she notes that the Japanese market is currently very momentum and trend driven, with high beta to the AI semiconductor trade in the US. Valuations are not at the deep discounts they once were, though Su notes that Japanese stocks are still well priced relative to their US equivalents. There is also a high degree of exposure in many Japanese export companies to the US consumer. Given some concerns about US consumer resilience, there could be a potential source of risk for Japan.
For advisors looking to play the upside in Japanese markets, Su believes that there is still upside to be found in certain laggard sectors. She notes that factory automation hasn’t yet enjoyed the same run up in price that other AI-related export sectors have. Other areas like autos have also underperformed somewhat and could offer some upside, especially if global GDP growth picks up.
Su explains that the domestic reflation story should start something of a virtuous cycle for Japan in the longer-term. Historically it was a country where people sat on assets. Holding cash didn’t cost you anything, so reserves were strong. Companies might hold onto large tracts of land, leaving it undeveloped. Now, a pro-growth government and underlying inflation all serves to incentivize investment, which could re-ignite Japanese growth and a view that Japan has broken out of its deflation trap.
“Japan has changed, I think, from a structural no growth market to potentially having stronger growth prospects than other global peers. I think that’s a very significant change,” Su says. “Japan used to be just a defensive market, right. You would go hide in Japan if the world blew up. You would buy the Yen, you would hide in Japan. And I think there’s a, maybe a shift from being just purely defensive to playing offense.”
