Why JPMorgan's Earnings Surge in Japan Signals a Structural Bull Case for Japanese Equities

Japan's equity markets are undergoing a quiet but profound transformation. JPMorgan's recent analysis of the country's corporate earnings surge—projected to grow 20% in Q3 2025—reveals a structural bull case rooted in three pillars: capital allocation efficiency, corporate governance reform, and under-owned equity markets. These factors, combined with persistent inflows from Japanese corporates via share buybacks and strategic divestments, are creating a compelling, multi-year investment opportunity amid global volatility.

Capital Allocation Efficiency: A New Era of Profitability

Japanese corporations have long been criticized for underperforming in capital allocation, but recent trends tell a different story. Return on equity (ROE) has surged to 9% by 2024, up from sub-3% in 2010, driven by tighter cost controls, higher operating margins, and a shift toward shareholder-centric policies. JPMorgan highlights that Japanese companies are now prioritizing capital expenditure (capex) in high-growth areas like AI-driven productivity tools and R&D, which could break through Japan's long-standing GDP growth ceiling of 0.5% real growth.

For example, the Tokyo Stock Exchange's policy reforms have incentivized firms to divest non-core assets and reinvest in core operations. This has led to a 96% year-over-year surge in share buybacks in FY9M2024, with companies returning over ¥10 trillion to shareholders. Such disciplined capital allocation is not just a short-term tactic—it signals a structural shift toward value creation.

Corporate Governance Reform: From Cross-Shareholdings to Shareholder Value

Japan's corporate governance overhaul has been a game-changer. Cross-shareholdings—once a symbol of Japan's opaque ownership structures—have plummeted by 75% in the past fiscal year. This reduction has freed up capital for more productive uses, such as buybacks and dividends, while also increasing transparency. JPMorgan notes that Japanese firms are now more responsive to market signals, with share price performance and cost of capital becoming central to boardroom discussions.

The impact is visible in the financials. Japanese companies have slashed underperforming subsidiaries and focused on core businesses, leading to a 20% earnings growth rate in Q3 2025. Sectors like Financials and Industrials are particularly well-positioned, as they benefit from global manufacturing recovery and U.S. capex demand post-election clarity.

Under-Owned Equity Markets: A Goldmine for Global Investors

Despite Japan's strong fundamentals, its equities remain under-owned by both domestic and international investors. Japanese retail investors hold 55% of their assets in cash, compared to 39% in the U.S. and 20% in Europe. Meanwhile, foreign investors have been net sellers of Japanese equities in 2024, even as the TOPIX delivered a 20% total return. This under-ownership creates a significant inflow potential, which JPMorgan estimates could drive the TOPIX to a low-teens upside in 2025.

The valuation gap is equally striking. The TOPIX trades at a forward P/E of 15x, compared to the S&P 500's 22x, offering a compelling discount. With JPMorgan projecting 9.0% and 8.5% earnings growth for 2025 and 2026, respectively, the index is undervalued relative to its fundamentals.

A Structural Bull Case Amid Global Volatility

The convergence of these factors—efficient capital allocation, governance upgrades, and under-ownership—positions Japanese equities as a hedge against global volatility. While U.S. tariffs and geopolitical risks loom, Japan's structural advantages (e.g., its role as the largest FDI investor in the U.S. and a smaller trade deficit with the U.S. than with China or Europe) provide insulation.

For investors, the case is clear:
1. Sector Focus: Prioritize Financials, Industrials, and Consumer Discretionary, which benefit from global trade recovery and domestic wage growth.
2. Long-Term Horizon: The multi-year bull case is underpinned by Japan's normalization of inflation, wage growth, and corporate governance.
3. Valuation Arbitrage: The TOPIX's 30% discount to the S&P 500 offers a margin of safety.

JPMorgan's YE25 TOPIX target of 3,075–3,175 reflects confidence in these dynamics. As Japan's corporate sector continues to outperform its GDP growth and global peers, the structural bull case is not just a market anomaly—it's a strategic opportunity for patient capital.

In a world of fleeting macroeconomic headlines, Japan's equity markets offer a rare blend of structural resilience and undervaluation. For investors seeking long-term growth, the time to act is now.