Last Updated on July 6, 2026 by Fiza Khurram
The Rally That Surprised the World Twice
Japan’s Nikkei 225 has been breaking records since early 2024, and June 2026 delivered the latest milestone: the index closed at 71,053.49 on June 19, 2026, its highest level ever. The broader Topix index also advanced 1.37% on the same day. The numbers are extraordinary because they arrive against a backdrop of sustained yen weakness, rising global interest rates that historically disadvantage equities, and a domestic economy that has spent three decades grappling with deflationary stagnation.
The question of why Japan is outperforming is simultaneously straightforward and underappreciated. Three structural forces have converged with unusual timing: a corporate governance revolution driven by the Tokyo Stock Exchange’s corporate reform programme; a weak yen that amplifies yen-denominated earnings for Japan’s global exporters; and a sustained wave of foreign institutional investment that followed Warren Buffett’s public endorsement of Japanese trading companies in 2023 and subsequent additions.
The Corporate Reform Revolution
The Tokyo Stock Exchange’s ongoing campaign to compel listed companies to address what was, bluntly, one of the worst records of capital allocation in any major developed market has been transformative. Japanese companies historically held enormous cash positions, maintained cross-shareholdings that obscured true book values, and generated returns on equity far below their global peers. Under the TSE’s reform framework initially launched in 2023 and significantly expanded in 2025–2026 companies trading below book value must disclose improvement plans or face delisting consequences.
The results have been visible in dividend increases, share buyback programmes, and the unwinding of cross-shareholdings that has released capital into more productive uses. Japan’s aggregate corporate dividend payout reached record levels in 2025–2026, making Japanese equities increasingly attractive for income-oriented investors globally.
| Reform Category | Pre-Reform (2022) | 2025–2026 Improvement |
|
Avg Return on Equity (ROE) |
~8% | ~11–13% (progressive) |
| Annual Dividends Paid | ~¥15 trillion | ~¥22 trillion (record) |
| Cross-Shareholding Unwind | Minimal | Accelerating; major sales by insurers, banks |
| Share Buyback Programmes | Limited | Record volume; above ¥10 trillion FY2025 |
| Companies with >1x P/B | ~50% of Prime Market | Improving; TSE compliance pressure |
The Yen Dimension: A Double-Edged Sword
The Japanese yen has been one of the weakest major currencies in 2026. By June 19, 2026, the dollar-yen rate had reached 160.89 the highest level since July 11, 2024 driven by the interest rate differential between the hawkish Federal Reserve and a Bank of Japan that has been the world’s most cautious central bank in normalising its ultra-loose monetary policy.
For Japanese equities measured in yen, this is a tailwind. Toyota, Sony, Hitachi, and Japan’s major technology exporters generate a significant proportion of revenues in dollars, euros, and other currencies. When those earnings are converted back to yen at a weaker exchange rate, the yen-denominated profit increases a mechanical boost to earnings per share that has directly supported the Nikkei’s record levels.
For foreign investors, this same dynamic is a currency risk. A dollar-based investor buying Nikkei exposure has had strong local-currency returns partially eroded by yen weakness in USD terms. Currency-hedged Japan ETFs have therefore significantly outperformed unhedged equivalents in the 2024–2026 period.
The Warren Buffett Effect and Foreign Capital
Warren Buffett’s Berkshire Hathaway’s successive increases in stakes in Japan’s five major trading companies Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo beginning in 2020 provided global institutional investors with the philosophical framework and the visible endorsement they needed to overcome deep-rooted scepticism about Japanese equities. The global investment community’s respect for Buffett’s research and conviction is such that his Japan endorsement effectively opened the asset class for a new generation of foreign allocators.
Foreign investor net buying in Japanese equities has been one of the dominant flows in Asian equity markets for 2024–2026. The combination of cheap valuations (even now, Japanese companies trade at significant discounts to US equivalents on price-to-earnings), improving corporate behaviour, and yen-driven earnings uplift has created a genuinely compelling multi-year investment case.
Risk Factors for Japanese Equities
Sustainability of the rally requires confronting several real risks. The Bank of Japan has been gradually normalising monetary policy from its ultra-loose historic stance raising rates incrementally from negative territory. Any acceleration of BOJ tightening would strengthen the yen, reverse the earnings translation tailwind, and potentially dampen the equity market’s appeal for foreign buyers attracted to the current interest rate differential.
Geopolitical risks in the Indo-Pacific North Korean instability, China-Taiwan tensions, and the repositioning of US security commitments toward the Middle East represent structural background risks for Japan’s security environment. A meaningful escalation in any of these theatres could rapidly reverse foreign investor sentiment.
Investment Access: How to Buy Japanese Equities
The iShares MSCI Japan ETF (EWJ) provides broad, low-cost exposure to Japanese equities, while the WisdomTree Japan Hedged Equity Fund (DXJ) offers the yen-hedged variant that removes currency risk. For investors wanting concentrated exposure to the corporate reform theme, specialist Japan value funds from managers including Man GLG, Jupiter, and Baillie Gifford have strong track records in the post-reform environment.
A Structural Story With Tactical Caution
Japan’s Nikkei at 71,053 is a market where the structural reform story is real and the earnings improvement is genuine. The combination of corporate discipline, foreign buying, and yen-driven earnings growth has created a multi-year investment case that has rewarded patient, conviction-driven investors. Tactical caution is warranted at current levels both because of the pace of the rally and because yen normalisation risk is rising but the long-term Japan thesis has rarely been more compelling.