The Japan Re-Rating Story Still Has Legs
February 2026 | Singapore
Foreign capital flows into Japanese equities appear poised to accelerate meaningfully following the Liberal Democratic Party’s (LDP) landslide election victory. Market strategists now forecast that overseas buying could rise by as much as five-fold in the coming months, potentially exceeding the levels recorded during the Abe-era reflation trade.
The renewed interest reflects a shift in global investor perception. Japan is no longer viewed merely as a cyclical trade or valuation anomaly, but increasingly as a market benefiting from earnings-supportive structural forces—notably improved growth dynamics, sustained corporate reform, and a credible reflation backdrop.
Political Stability and Policy Credibility
Prime Minister Sanae Takaichi’s historic election victory has strengthened this narrative. Her decisive mandate is widely interpreted as granting political capital to push ahead with pro-growth and pro-business policies, including fiscal initiatives aimed at reinforcing domestic demand while maintaining Japan’s reform trajectory.
For global allocators, the significance lies less in short-term stimulus headlines and more in policy credibility and continuity. The combination of governance reform, capital discipline, and a more supportive macro environment has reduced Japan’s long-standing political and structural risk premium. As a result, Japan is increasingly transitioning from a chronic underweight in global portfolios to a strategic allocation.
From “Value Trap” to Re-Rating Story
Japanese equities have transitioned from a multi-decade “value trap” narrative into a credible, policy-backed re-rating story. This shift is not driven by leverage or speculative excess—as in the late 1980s—but by governance reform, capital discipline, shareholder returns, and renewed foreign participation.
For global investors, Japan today offers a rare combination: quality global champions, deep balance-sheet value, improving ROE, and political continuity. The result is a market that is no longer merely “cheap,” but structurally changing how capital is treated.
EWJ, the “Iron Lady,” and the Land of the Rising Stock Market
When Margaret Thatcher, the original Iron Lady, governed the United Kingdom in the 1980s, Japan was the envy of global markets. The Nikkei 225 surged relentlessly as Japan’s economic model, industrial dominance, and export prowess appeared unstoppable.
By the late 1980s, however, the Japan trade had become the most crowded trade in the world. Excessive leverage, speculative real estate values, and detached equity valuations culminated in the 1989 collapse. What followed were nearly three decades of de-rating, deflationary psychology, and chronic under-ownership by global investors—giving rise to the concept of “Asia ex-Japan.”
Today’s setup is fundamentally different. Japan is no longer a momentum story built on leverage. It is a re-rating story built on discipline.
Key Drivers of the Re-Rating
Governance Reform: The Structural Catalyst
The Tokyo Stock Exchange has explicitly pressured companies to improve capital efficiency, unwind cross-shareholdings, increase shareholder returns, and communicate clearer capital-allocation policies. This has triggered a quiet but powerful shift in corporate behaviour.
Macro Regime Shift
Japan has exited negative interest rates, marking a regime change that supports healthier banking profitability, improved price discovery, and a slow return of nominal growth.
Political Continuity
The election victory of Sanae Takaichi reinforced market confidence in policy continuity and reform momentum. Markets interpreted the outcome as supportive of pro-business stability and capital-market reform.
Earnings Engines
Japan offers global champions embedded in AI and automation supply chains, financials benefiting from yield normalization, and domestic sectors gaining from wage growth and tourism.
Valuation and Scenarios
Japan’s historical discount is narrowing as ROE and shareholder alignment improve. The re-rating remains ongoing rather than complete.
EWJ ETF Summary
The iShares MSCI Japan ETF (EWJ) provides broad exposure to large and mid-cap Japanese equities, capturing governance-driven re-rating and rising shareholder returns. EWJ serves as a practical allocation tool for investors revisiting Japan as a structural developed-market opportunity. EWJ closed USD 91.29 on February 9th and the USD/JPY rate was about 155 levels.
Conclusion
Japan is no longer the crowded trade. It is a rediscovered market built on discipline rather than excess, with improving fundamentals and renewed global relevance.
Disclaimer: This document is for informational purposes only and does not constitute investment advice or a solicitation. Investors should seek independent financial advice.
Rainer Michael Preiss
Partner & Portfolio Strategist — [email protected]
Rainer Michael Preiss is a German national and an investment advisor based in Singapore. He has over 25 years of experience in global private banking and multi-family office business across Europe, Middle East, Africa and Asia. Michael was previously the Chief Equity Strategist at Standard Chartered Bank (SCB) where he was one of seven voting members on the Global Investment Council which decided on SCB’s global investment policy. He is also a prolific and renowned contributor to the financial media world where he is a columnist for Forbes and is frequently featured on Bloomberg, CNA and CNBC.
