12/25/2025
Takaichi, AI, Corporate Reform Pave Way for Japan Stocks in 2026
Bloomberg (12/25/25) French, Alice; Ishikawa, Eru
Japan’s stocks are expected to extend gains in 2026, with Prime Minister Sanae Takaichi’s aggressive fiscal plans building on the momentum of the past year. Tokyo’s benchmark Topix index has weathered tariff shocks, two Bank of Japan rate hikes and a change of prime minister to gain about 23% this year, putting it on track for its biggest outperformance versus the S&P 500 since 2022. The rally — which led Japan’s benchmarks to multiple record highs — has laid the foundations for further gains, strategists say. Construction, infrastructure and energy shares are set to shine next year as Takaichi’s government pledges trillions of yen in domestic funding. Robot makers may win out, too, as tech focus shifts toward physical AI. Banks, among this year’s top performers thanks to higher interest rates, are also expected to extend their rally. Japan’s first female prime minister unveiled around ¥18 trillion ($115 billion) in extra stimulus funding in November, fueling investor optimism. Her plan focuses on spending to bolster 17 “strategic industries,” including quantum computing and nuclear fusion. The impact from Takaichi’s growth strategy “has got to be net positive for the economy, especially for the equity market,” said Naoya Oshikubo, chief market economist at Mitsubishi UFJ Trust & Banking Corp. “Semiconductors, infrastructure, construction companies will all see tailwinds.” Takaichi’s utility subsidies and cash handouts should also boost retail stocks by giving consumers more disposable income, said Chris Smith, a portfolio manager at Polar Capital LLP. But Takaichi brings downside risks too, Smith warned. “She needs to be careful, because her aggressive fiscal policy has been a source of pressure on the yen and bond rates,” he said. Japan’s ongoing diplomatic spat with China, which was triggered by Takaichi’s comments on Taiwan, could also weigh on equities if it escalates, Smith added. Japan’s corporate governance code is due for an update in 2026, driving anticipation for juicier shareholder returns. The revisions are likely to target idle cash holdings, an area Takaichi has said she wants to address. “We think the Financial Services Agency and Tokyo Stock Exchange are going to start putting pressure on companies who have over a certain level of cash on their balance sheet,” said Polar Capital’s Smith. If cash-rich companies boost shareholder payouts or invest in growth, Japanese stocks will become more attractive, he said. Some companies may reallocate cash to mergers and acquisitions. That would further fuel Japan’s ongoing deals boom, wrote Morgan Stanley MUFG Securities Co. strategists including Sho Nakazawa in a report. “We hope to see not only a review of balance-sheet management but also an acceleration of initiatives to raise profitability,” including M&A, R&D and wage increases, they wrote. M&A activity this year attracted domestic and global activist investors seeking hidden value. Japan saw 171 activist campaigns in 2025, the most ever, according to Bloomberg Intelligence.
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