Issue:
December 2025 | Deep Dive
Nikkei surge a sign of a quiet revolution in Japan's economy, FCCJ event hears
While Japan's benchmark Nikkei 225 stock average has soared recently, setting a new record, it does not signal the dawn of a new bubble economy, according to Hiromi Yamaji, group CEO of the Japan Exchange Group (JPX).
Instead, the Nikkei’s surge points to investor recognition of fundamental changes in Japan's economy that have triggered a shift in global investment flows into the country’s financial markets.
“The Japanese economy's move out of deflation continues, momentum is continuing and we are hearing good feedback from global investors," Yamaji said at a recent event at the FCCJ. "Even heightened global uncertainty had a positive impact as the strength and appeal of the Japanese market becomes clearer."
The facts support his theory. Japan is emerging from decades-long deflation with the headline inflation rate constantly hitting above 2%. Japanese companies are increasing their capital spending, especially in the areas of automation and digitalization, while also making labor-saving and efficiency investments to address a chronic labor shortage.
Japanese firms have also achieved record-high overall net profits for four consecutive years. And in the past 25 years following the bursting of the bubble economy, company profits have increased tenfold times to record highs.
What's more, Yamaji said, Japan now finds itself in a unique position in the global geopolitical environment, given the rising tensions between the U.S and China. These have precipitated a shift in economic dynamics. While the U.S. market and economy appear to be thriving, investor sentiment has changed. "Eurocentric portfolio investors are gradually shifting their investments out from the U.S. and into Asia to diversify their portfolios - the so-called ‘U.S. plus one strategy.’”
China remains important as an alternative investment destination, but its appeal is waning. Japan, meanwhile, has emerged a leading destinations, because the current uncertain global situation has magnified the stability and the resilience of its stock market and economy.
The size of Japan’s economy – the world's fourth biggest – and markets, as well as its abundant liquidity, relative stability and adherence to the rule of law make it one of the most investable markets in Asia, Yamaji said. And the steady progress of corporate governance reform is helping to sustain that momentum.
The nature and extent of Japan’s corporate governance revolution has likely not been fully appreciated yet in the outside world. As Yamaji said: “There are still some misconceptions about how active Japanese domestic investors are. Institutional investors' level of engagement and commitment to stewardship has increased, with more transparency around their voting policies and practices. Also, retail investors have a stronger presence in the market."
Corporate governance reform is creating sustainable, voluntary changes in Japanese companies' practices, prompting strong foreign inflows into Japanese equities, a trend that has continued since Sanae Takaichi - an advocate of former Prime Minister Shinzo Abe's market-friendly policies – became prime minister in October.
The Japanese market still has ample room to grow on the back of domestic investment. As Yamaji noted, Japanese households still hold more than 50% of their financial assets – estimated by the Bank of Japan at ¥2,200 trillion ($14.7 trillion as of September) – in the form of bank deposits, and only 2.6% has shifted from savings to investment since last year. The shift is accelerating, and that should provide even greater incentives for foreign investment.
Even so, the Japan Exchange Group is not sitting on its laurels. "There are other important initiatives at JPX," Yamaji said. "One is the startups or derivatives market and use of AI, supporting the growth of startups companies and listing of foreign startups. Startups are very important as they lead the growth of the Japanese economy with innovation and technology."
Historically, initial public offerings or IPOs have been an important means of fundraising for startups in Japan, since there were few institutional investors in the private market. But as Yamaji pointed out: “Many startups fail to achieve the high growth potential after listing. And because their market capital or size stays relatively small, those startups remain ‘uninvestable’ for institutional investors. That becomes a negative spiral for long-term investor support.”
To address this problem, the Tokyo Stock Exchange (TSE) plans to revise its listing rules. Current rules require companies to have at least ¥4 billion market capitalization within 10 years of listing, but under planned new rules the benchmark will be raised to ¥100 billion within five years.
According to Yamaji, the TSE plans to utilize the JPX market as an incubator for Asian startups – a venture that will be known as the TSE Asia Startup Hub. He described it as an “ecosystem” of 56 partners from banks, brokers, venture capital companies, audit firms, and law firms that support 20 Asia startups from Singapore, Taiwan, Vietnam, Malaysia, the Philippines, South Korea, and Indonesia.
Anthony Rowley is a columnist and contributor for the South China Morning Post.
