Japan trip May 2026: Main takeaways

We spent the week of 18th May in Japan, attending an equity conference and meeting companies and other business contacts outside the conference. Our main conclusion is straightforward: let the good times roll, and keep individual stock investment theses simple rather than overthinking them.

Macro backdrop: Rates, JGBs and supply chain stress

A recurring topic was the sharp rise in JGB yields. In many ways, the JGB market is experiencing its own version of the US taper tantrum in 2013. Bank of Japan bond purchases are down roughly 40% year on year, and many investors are asking whether higher yields could threaten equities.

Our view is that Japan is better placed than many assume. Listed corporates and households are both highly cash-rich on a net basis, and many would welcome higher rates as support for non-operating and household income. Real rates also remain very low, while the equity market dividend yield is still around, or slightly below, the 10-year JGB yield.

Other macro discussions focused on supply chain pressure following the closure of the Strait of Hormuz, with the global supply chain pressure index once again flashing red. In that environment, cyclical and value stocks look less attractive, while the market is increasingly willing to pay for structural growth.

FED global supply chain pressure index

Source: CLSA

Corporate governance and engagement day in Tokyo

Western analytical frameworks are increasingly shaping market direction in Japan. While Japanese laws and business norms remain distinct, they are converging with global best practice and becoming more familiar to international investors. The shift has practical roots: after the global financial crisis, the government pension fund was heavily exposed to JGBs offering negligible real returns. Prime Minister Shinzo Abe recognised that capital needed to move out of bonds and into equities, and that the transition had to succeed. In that sense, the introduction and iterations of the Corporate Governance Code and Stewardship Code became reality as a matter of necessity, as the government could not continue subsidizing an effectively zero yielding pension system indefinitely.

Japan has also become a focal point for global private equity, private real estate – as yet again confirmed by the CEO of KKR Real Estate Japan over dinner- and activist investors. M&A activity has accelerated, helping consolidate the fragmented market shares that have long characterised many Japanese industries. For years, investors looked at low Japanese ROEs and concluded the market should be avoided. Today, the governance transformation suggests the opposite: low returns increasingly signal scope for improvement while global technology leaders in materials and capital goods offer a strong growth outlook. In our view, that creates the prospect of five to ten strong years for equities as profitability rises and valuations rerate.

What to buy in Japan if AI and technology peak

Another key question was what to own if the technology and AI trade begins to peak or level off. Our first answer is simple: banks and defence. Japan’s top three banks have delivered net profit growth of more than 30% year on year over the past two years, supported by strong loan growth, net interest margin expansion, and two BoJ rate hikes in each of those years.

The bond market is pricing in further rate hikes this year. Consensus forecasts, however, remain far more cautious, with analysts expecting only around 8% aggregate bank net profit growth this fiscal year. Both views cannot be right: either the BoJ will not hike rates, or earnings forecasts are far too conservative. Based on our discussions with financial group executives, we suspect the latter.

With government subsidies reducing core CPI by around 1.4 percentage points, we think the BoJ needs to raise rates to avoid placing an excessive burden on taxpayers. From an equity perspective, we expect a 25bp hike on 16 June and another later in the year. That would be particularly important for financials generally and for bank stocks in particular.

Market conditions: Performance concentration

Return concentration has reached record highs. Market breadth has collapsed, with only 36% of companies outperforming MSCI Japan this year, down sharply from 49% in 2025 and marking a historic low. SoftBank Group has now overtaken Toyota Motor as Japan’s largest company by market capitalisation.

AI-driven concentration is distorting traditional style relationships and increasing the risk for momentum strategies. Even so, the cycle remains fundamentally supported by earnings. As of writing, the Nikkei 225 is up 33% year to date (31% in GBP terms), while TOPIX is up 15.4% (13.6% in GBP terms). This compares with the S&P 500 at 10.7% (10.8% in GBP), the NASDAQ at 16.1% (16.2% in GBP), and the Euro Stoxx at 4.5% (3.7% in GBP terms).

AI vs. Non-AI

The divergence between AI and non-AI stocks remains striking. AI-related stocks, which now account for 22% of MSCI Japan, are up 67% this year, versus just 7% for non-AI stocks. The gap in earnings revisions is even more pronounced, with upgrades of 43% for AI names compared with only 5% for non-AI.

Valuations are elevated, with AI stocks trading on 30x 12-month forward P/E after a 33% rerating this year. However, on a growth-adjusted basis, the theme still does not look overly expensive, with AI on 0.8x PEG versus 1.5x for non-AI. In other words, despite concentration risk and higher volatility, the AI trade continues to be supported by strong earnings delivery and compelling GARP characteristics.

Some anecdotes

Kioxia, the previously little-known Toshiba memory spin-off, is now Japan’s third-largest listed company. As of Friday 29 May, its market capitalisation had surpassed that of Mitsubishi UFJ Financial Group (MUFG), reaching Y36.0tr. Its shares have surged more than 2,900% over the past 12 months, making it the top performer in the MSCI World Index over that period. The rally reflects surging NAND memory demand linked to AI infrastructure build-out. Yet valuations have somewhat compressed (<10x), as performance was largely driven by revenue and earnings growth rather than valuation multiple expansion. In other words, the danger is not excessive valuations, but a possible peak in revenues and earnings in FY3/28.

Kioxia – 12 month share price performance

Source: Bloomberg

SoftBank Group has also been one of the most influential individual stocks in both TOPIX and the Nikkei, contributing significantly to daily gains and losses depending on the session. On Monday 1 June, it replaced Toyota Motor as Japan’s largest company by market capitalisation.

Softbank Group – 5 year share price performance

Source: Bloomberg

If one accepts the value of Arm Holdings (listed) and the prospective value of OpenAI, SoftBank Group would still appear to trade at a very significant discount to its sum of the parts. That leaves plenty of room for further debate.

Many investors may view this as uncharted territory, although others will remember 1999 and 2000. The market narrative is that “this time is different”. It looks like it is somewhat different, but we shall see.

Earnings season

The 4Q FY3/26 earnings season in Japan was strong, with sales, operating profit and net profit beats of 64%, 60% and 65% respectively. Aggregate TOPIX earnings grew 27% year on year, exceeding expectations by 5%. Corporate guidance for FY3/27 remains conservative, pointing to 9.0% operating profit growth based on an average FX assumption of Y150/$, versus the current rate of around ¥159/$.

Market dynamics and positioning

Japan is experiencing one of the sharpest risk rallies in a decade, with the move increasingly overlapping with momentum. As risk is repriced, crowded positioning leaves momentum strategies vulnerable to sharp short-term unwinds, even though earnings remain supportive. This was evident last month, when high-beta momentum stocks experienced significant volatility.

As of the week ending 22 May, foreign investors were net buyers of Y2.6tr, taking cumulative net buying to nearlyY19tr over the past year.

Preferred stock selection

Overall, our conclusion is to look through short-term noise and recent concentration in market performance, and instead add to stocks with improving or already high returns on equity, strong cash-flow generation, low year-to-year earnings volatility, and limited financial leverage. One holding that stands out on these measures is Keyence, the global leader in factory automation solutions.

That said, Japan remains a much less concentrated market overall, and there are still many attractively valued technology-related names, especially in materials. Investors should note that the Japanese equity market is far less dependent on a small number of technology stocks than some of its regional peers, while the corporate governance reform story should continue to support performance for at least another five years.

Top10 market cap weighting by Market

Source: CLSA

Our preferred stock selection criteria remain focused on names meeting our attributes of 1) a sustainable competitive advantage, 2) ability to generate and grow future Free-Cash-Flow, 3) management alignment with shareholders and stakeholders 4) attractive valuations relative to opportunity and risk.