Japan's Equity Market Resurgence: Harnessing Momentum in Yen-Sensitive Sectors

Japan's equity market is undergoing a transformative phase, driven by a confluence of structural reforms, monetary policy normalization, and shifting investor behavior. For momentum-driven investors, yen-sensitive sectors-particularly financials, manufacturing, and corporate reform beneficiaries-present compelling opportunities amid Japan's reflationary environment.

Monetary Policy Normalization and Reflationary Tailwinds

The Bank of Japan's (BoJ) exit from negative interest rates in March 2024 marked a pivotal shift, ending decades of deflationary policy and catalyzing a reflationary surge in equities. As stated by Lombard Odier in a September 2025 note, this policy pivot has improved corporate pricing power and profitability, particularly for financial institutions, which now benefit from higher lending margins and reduced hedging costs for exporters. The Nikkei 225 index, for instance, rose 11% since July 2025, while the Topix surged over 25% in yen terms during 2023, reflecting robust earnings growth and improved investor sentiment, according to BlackRock.

The yen's relative weakness-amid a weaker U.S. dollar and BoJ tightening-has further amplified returns for yen-sensitive equities. Export-oriented sectors like autos and tech hardware are particularly well-positioned, as weaker yen boosts revenue from overseas sales. Toyota Motor and Shin-Etsu Chemical, for example, announced Y12.1 trillion in share buybacks from January to May 2025, signaling confidence in their balance sheets and aligning with broader corporate governance reforms, according to W1M.

Corporate Governance Reforms and Shareholder Value Creation

Structural reforms spearheaded by the Tokyo Stock Exchange and institutional investors have reshaped Japan's equity landscape. Improved capital allocation practices, including aggressive share repurchases and dividend increases, have driven earnings per share (EPS) growth. According to AllianceBernstein, Japanese companies reduced cross-shareholdings and prioritized shareholder returns, with return on equity (ROE) metrics improving significantly since 2023.

The Nippon Individual Savings Account (NISA) program has also democratized access to equities, encouraging retail investors to allocate more capital to stocks. This shift mirrors the U.S. IRA model and has spurred demand for high-value products and wealth management services, further boosting financial sector performance, according to Morgan Stanley.

Momentum Strategies and Fund Performance

Momentum-driven strategies have thrived in this environment. ETFs and actively managed funds that hedge against yen depreciation have outperformed, with the WisdomTree Japan Hedged Equity Fund delivering 30.2% in 2024 and the iShares MSCI Japan USD Hedged UCITS ETF returning 25.6% in the same period, according to Fund Selector Asia. Actively managed funds, such as the Dekaloc Quality PrivilEdge – Alpha Japan Fund, achieved 31.4% in 2024 by leveraging thematic exposure to automation and aging population trends, a performance also noted by Fund Selector Asia.

Risks and Long-Term Outlook

While momentum remains strong, risks persist. Geopolitical tensions and currency volatility could dampen exporter margins, and political uncertainties-such as leadership contests in Japan's Liberal Democratic Party-may introduce short-term volatility; Lombard Odier has highlighted these political headwinds. However, the structural shift toward corporate governance improvements, wage-price cycles, and global competitiveness positions Japanese equities as a long-term alpha generator.

For investors, the 4Rs-reform, restructuring, reflation, and reshoring-remain central to Japan's economic revival. As Advisorpedia notes, Japan's attractive valuations and earnings growth potential make it a compelling addition to global portfolios, particularly for those seeking diversification and exposure to reflationary trends as Advisorpedia notes.

Conclusion

Japan's equity market is no longer a "value trap" but a dynamic arena where momentum strategies can capitalize on yen-sensitive opportunities. With corporate reforms, monetary normalization, and structural tailwinds in place, the stage is set for sustained outperformance-provided investors remain attuned to both the risks and rewards of this evolving landscape.