🎌🔭 Eastspring’s View: Behind Japan’s Repeated Record Highs, Long-Term Value Hong Kong Investors Can’t Ignore ⛩️💹

Recently, Japanese equities have continued their strong performance. The Nikkei 225 rose 16% in April and gained over 10% in May, reflecting sustained capital inflows. Following a brief sell-off in March, investor sentiment has significantly stabilized as concerns over short-term energy supply eased and factory output remained robust.

On monetary policy, the Bank of Japan kept its short-term interest rate unchanged at 0.75% in April, maintaining a cautious tightening bias to balance supporting economic growth against managing inflation risks. Despite ongoing uncertainties from Middle East tensions and energy prices in the coming quarters, Japan’s economy has already demonstrated a solid foundation ahead of external shocks.

Notably, while markets may remain volatile in the near term due to geopolitical factors, Japanese corporate fundamentals have undergone structural improvements. Over the past decade, corporate governance has steadily enhanced, return on equity has gradually increased, dividends and share buybacks have risen, and companies have actively deployed excess cash to improve capital efficiency. With real wages poised to turn positive and profitability improving, the upward trend in shareholder returns is set to strengthen further. In terms of valuation, Japanese equities are undergoing a repricing phase, currently trading at around 1.8x price-to-book (as of end-2025), still offering clear attractiveness compared to U.S. and European markets.

Amid escalating geopolitical risks and heightened global asset volatility, investors are actively seeking markets offering both 'predictability' and 'structural growth.' Once viewed for decades as a low-growth economy, Japan is now presenting a markedly different picture in 2026—not only repeatedly hitting record highs in its stock market but also gradually reducing reliance on exchange rates and external conditions, emerging as a key focal point in global capital reallocation.

This shift presents Hong Kong investors not only with an opportunity for asset diversification but also a critical window to participate in Asia’s next cycle of capital repricing.

1️⃣ Policy Pivot: Market 'Maturation Signal' Behind Interest Rate Normalization

In April 2026, the Bank of Japan held rates steady at its monetary policy meeting (April 27–28), though markets widely expect it to continue advancing interest rate normalization going forward. Notably, even as the USD/JPY exchange rate briefly touched the historically weak level of 160, the central bank chose to remain on hold—signaling a shift in policy focus from solely supporting the yen to balancing inflation and economic growth.

More importantly, Japanese equities have not been pressured by yen weakness; instead, they have continued to strengthen—even outperforming U.S. stocks—indicating that equity performance is gradually decoupling from exchange rate movements. This growing 'independence' marks the market’s transition from a cyclical, export-driven model toward a mature market driven by domestic demand and corporate earnings.

2️⃣ Structural Transformation: Japanese Equities Are No Longer Just a 'Reflection of Export Economy'

Data shows that the correlation between the Tokyo Stock Price Index (TOPIX) and the yen exchange rate has significantly declined in recent years, reflecting deep structural changes in Japan’s economy. Corporate earnings are now driven less by currency advantages and more by:

This means that even if the yen appreciates in the future, corporate earnings could still maintain their growth momentum, fundamentally reducing the impact of exchange rate volatility on the equity market.

3️⃣ Resilience Amid Volatility: Rapid Capital Re-entry Validates Market Quality

Amid recent geopolitical tensions in the Middle East and heightened supply chain uncertainty, Japanese equities have once again demonstrated strong resilience. Market reactions to geopolitical events have become increasingly rational, with investors viewing short-term volatility as a temporary disruption—similar to past episodes like pandemics or natural disasters—rather than a structural risk.

Capital has also flowed back rapidly, reflecting investor confidence in the medium- to long-term outlook for Japan’s market. This characteristic of 'rapid re-entry' essentially indicates ample liquidity and solid fundamental support.

4️⃣ Global Capital Reallocation: Japan Benefits from 'De-Dollarization'

Against the backdrop of an emerging global trend toward de-dollarization, Japan is becoming a key destination for capital reallocation.

Notably, during the market turbulence in March, U.S. investors were the only group to record net purchases of Japanese equities—a highly significant indicator. When investors from the world’s largest capital market begin increasing their allocations to Japanese stocks, it signals that Japan has entered core portfolio considerations.

Meanwhile, foreign inflows into Japanese equities reached a record high in April 2026, demonstrating that Japan’s market appeal has surpassed other regional markets, making it the primary beneficiary of capital inflows.

5️⃣ Valuation Advantage: Still 'Relatively Cheap' After a Three-Year Rally

Although Japanese equities have been rising continuously since 2023, they remain notably attractive from a valuation perspective:

This suggests that Japanese stocks are still in the early phase of 'valuation rerating,' rather than in a late-stage bubble territory.

In addition, Japan’s economy is gradually moving out of deflation and entering a mild inflationary environment. Companies now have the ability to pass on costs, creating ample room for gross margin improvement and providing further support for earnings growth.

6️⃣ Policy and Corporate Reforms: Building a 'New Normal' Growth Trajectory

Japanese corporations have consistently pursued financial restructuring and improvements in capital efficiency in recent years, including:

Meanwhile, government policy continues along the path of 'industrial support + fiscal expansion,' focusing on strategic sectors such as semiconductors, AI, defense, and industrial upgrading, creating a virtuous cycle of mutual reinforcement between policy and corporate activity.

The market broadly expects that, with improving nominal economic growth, Japanese equities could see their valuations rise to a P/E range of 20x–23x, gradually establishing a new valuation anchor.

7️⃣ Multiple Drivers: Investment Opportunities in Japan Are No Longer Singular

Unlike the current global market’s excessive concentration on AI-related themes, Japanese equities exhibit a healthy, 'multi-factor driven' structure:

Additionally, defense spending as a share of GDP is expected to increase, creating potential opportunities in chemicals, precision components, and satellite-related industries.

8️⃣ Rise of Domestic Capital: NISA Provides Structural Support

Japan’s government-promoted NISA (Nippon Individual Savings Account) system is gradually reshaping household asset allocation. An increasing number of Japanese households are shifting funds from cash into equities and mutual funds, creating a stable source of domestic capital.

This not only supports equity valuations but also boosts consumption through the 'wealth effect,' further enhancing corporate earnings and reinforcing a positive feedback loop.

9️⃣ Investment Implications: How Can Hong Kong Investors Seize These Opportunities?

Amid global uncertainty, Hong Kong investors can reassess their Japanese equity exposure from the following perspectives:

🔎 Conclusion 💴

Amid escalating global geopolitical risks and heightened asset price volatility, Japan is gradually emerging as one of Asia's most attractive investment markets, thanks to its 'policy predictability,' 'corporate reform momentum,' and 'inflow of capital.'

This represents not just a short-term asset allocation choice, but a structural, long-term investment opportunity.

For Hong Kong investors, rather than chasing already highly valued markets, it is wiser to seize this historic moment of Japan’s transition 'from undervaluation to revaluation.'

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