Japan’s economic foundations driving investor confidence

Japan’s financial markets are drawing renewed global attention as equities post one of their strongest advances in decades.

In October 2025, the Nikkei 225 index recorded a monthly advance of 16.6%, marking its strongest rise in 35 years and pushing deeper into record territory.

The surge coincides with the election of Sanae Takaichi as Japan’s first female prime minister, which intensified observations on Japan’s markets and policy direction.

Foreign investors have responded decisively, as net purchases of Japanese cash equities reached about ¥5.4 trillion, roughly $35 billion, during 2025, according to the Tokyo Stock Exchange. During the year, equities in Japan ranked among the best-performing major markets in both local currency and US dollar terms.

Leadership as key economic factor

Ms. Takaichi assumed office after the Liberal Democratic Party lost its parliamentary majority in July 2025. She later formed an alliance with the Japan Innovation Party following a break with Komeito in October. While the alliance did not secure an outright majority, independent lawmakers supported her, providing 237 of 465 votes in the prime ministerial election.

The administration outlined key policy priorities aimed at easing inflation, strengthening energy security, and raising defense spending. Policy measures under consideration include the removal of the provisional gasoline tax, subsidies for electricity and gas fees, adjustments to income tax deductions, and a potential temporary consumption tax exemption on food and beverages for up to two years.

Japan also plans to restart nuclear power plants that were shut down after 2011 and accelerate the development of next-generation reactors and fusion technology. Defense spending is expected to reach 2% of gross domestic product (GDP), advancing earlier than the originally planned 2027 target.

Public support for the new government is strong, with approval ratings between 70% and 80%, among the highest in decades, according to J.P. Morgan. Economists say this level of political stability supports the execution of economic and market policies.

Ms. Takaichi’s economic stimulus measures include a ¥17.7-trillion package as part of a broader ¥21.3-trillion plan, prompting expectations that the Bank of Japan may raise its growth outlook.

Market indicators and investor confidence

The Tankan business conditions index for manufacturers rose to 15 in the final quarter of 2025, the highest reading since 2018. Small and medium manufacturers recorded the strongest gains, supported in part by lower US tariffs on Japanese goods, which were cut from 25% to 15%.

Exports to the United States rebounded in November, rising 8.8% from a year earlier after seven months of declines. Consumer confidence, meanwhile, reached its highest level since April 2025.

Japan’s labor market also remains favorable for both consumers and investors. Non-agricultural employment increased 0.9% from a year earlier in November, while the unemployment rate stayed at 2.6% for four consecutive months amid rising labor force participation.

Nominal contractual earnings grew 2.2% in November, up from 1.9% in September. Rengo, the largest labor union group, seeks a 5% wage increase in Spring 2026 negotiations, matching its request from the previous year. In 2025, average wage gains reached 5.25%.

According to the Ministry of Foreign Affairs, the government plans to train 2.3 million personnel to advance digitalization between fiscal years 2022 and 2026. Highly skilled foreign professionals are encouraged through preferential residency programs, including “J-Skip” and “J-Find.”

Focusing on innovation and business growth

Japan’s infrastructure and capital markets remain key attractions for international firms. The Tokyo Stock Exchange continues to rank as the world’s third-largest, while government incentives encourage research and development and patent filings.

Japan leads the Group of Seven (G7) in research and development spending, and hosts the largest number of researchers, which creates a robust environment for innovation.

Over the next decade, more than ¥150 trillion in public-private investment is planned for Green Transformation, supported by the issuance of GX Economy Transition Bonds worth ¥20 trillion.

The government also targets expanding the semiconductor sector and bioeconomy market for total sales of ¥15 trillion and ¥100 trillion by 2030, respectively.

Startups and established firms benefit from advanced technology infrastructure, open innovation platforms, and a highly skilled workforce in information technology and engineering disciplines.

Policies also favor foreign-capital companies, including supportive regulatory conditions and financial services, enabling Japan to serve as a regional business and financial hub.

Economic partnership agreements and free-trade agreements cover approximately 80% of Japan’s trade, enhancing access to international markets and increasing the appeal for foreign investors. Inbound mergers and acquisitions have grown fivefold since 2014.

According to Grant Thornton, Japan’s growth sectors include information and communications technology, life sciences, energy, advanced manufacturing, and tourism. Consequently, the Japan External Trade Organization (JETRO) reports that data centers, logistics, health care, and real estate continue to draw significant interest from foreign investors.

Foreign investment momentum

According to JETRO’s Invest Japan Report 2024, inward foreign direct investment (FDI) stock reached ¥50.5 trillion at the end of 2023, up 9.3% from the previous year, equivalent to about 8.5% of GDP.

Investment from the United States and Taiwan showed double-digit growth, driven by large semiconductor projects, including Taiwan Semiconductor Manufacturing Company’s second plant in Kumamoto and technology upgrades by Micron Technology, Inc. in Hiroshima.

JETRO added that the nation ranks first in Asia in the Foreign Direct Investment Confidence Index and among the top Group of 20 (G20) nations for political stability and governance.

The government aims to raise FDI stock to ¥100 trillion by 2030 through tax reforms, investment incentives, and programs focused on innovation, advanced manufacturing, and strategic sectors such as electric vehicles and semiconductors.

The Ministry of Foreign Affairs has expanded its global investment promotion network, establishing FDI task forces in major financial centers and hosting seminars to showcase Japan’s business environment.

Beyond market factors

Corporate governance reforms have reinforced Japan’s appeal to investors, according to Man Group. Companies have accelerated efforts to improve capital efficiency by selling non-core assets and reducing cross-shareholdings. Return on equity has also increased from approximately 8.4% to 9% in the last few years.

About 80% of companies listed on Japan’s prime market now submit capital improvement plans. A planned update to the Corporate Governance Code in mid-2026 is expected to target excess cash holdings, often seen by investors as a drag on company value.

Aside from this, the country has the lowest crime rate among G7 nations. Japan also provides public health insurance coverage for residents and hosts 115 International Baccalaureate World Schools.

Visitors frequently note the country’s cleanliness, and the World Economic Forum ranks Japan third globally and first in the Asia-Pacific region for travel and tourism development. — Mhicole A. Moral