Japan's Nikkei Hits New Record Highs — What's Driving the Rally

Japan's benchmark Nikkei 225 index has surged well past its famous 1989 asset bubble peak, reaching all-time highs above 59,000 in early 2026 before pulling back toward the mid-50,000s. After decades of stagnation that earned the label "the lost decades," Japanese stocks have become one of the hottest trades in global markets. What changed, and should international investors be paying attention?

Corporate Governance Reforms Are Working

Perhaps the most significant driver of Japan's stock market revival is a fundamental shift in corporate governance. The Tokyo Stock Exchange has been aggressively pushing companies to improve shareholder returns and capital efficiency. Companies trading below book value — a chronic problem in Japan — have been publicly called out and pressured to develop plans for improvement. The response has been meaningful: record share buybacks, increased dividend payouts, and a new willingness to unwind cross-shareholdings that depressed returns. In April 2025 alone, Japanese companies announced ¥3.8 trillion in buybacks — nearly triple the prior year's figure. Japanese companies are finally starting to run their businesses with shareholders in mind, and the results are showing up in improved return on equity across the market.

The Weak Yen Tailwind

The Japanese yen has remained weak against the US dollar, trading around ¥157 per dollar as of early March 2026. For Japan's export-heavy economy, a weaker yen is a powerful tailwind. Companies like Toyota, Sony, and the major trading houses earn significant revenues overseas, and when those foreign-currency earnings are converted back to yen, they're worth more. This currency effect has boosted corporate profits and driven earnings upgrades across many sectors. However, the weak yen is a double-edged sword — it increases the cost of imported energy and raw materials, hurts domestic purchasing power, and can unsettle foreign investors who see their returns eroded when converted back to their home currency. The Bank of Japan faces a delicate balancing act: Deputy Governor Ryozo Himino has signalled the central bank intends to continue raising rates, even as Prime Minister Takaichi has expressed concern about further hikes.

The Warren Buffett Effect

It would be difficult to discuss Japan's stock market revival without mentioning Warren Buffett. Berkshire Hathaway's well-publicised investments in Japan's five major trading companies — Mitsubishi, Mitsui, Itochu, Marubeni, and Sumitomo — put a spotlight on Japanese equities and gave a stamp of approval from the world's most famous investor. The investments have performed spectacularly well, and the attention they drew encouraged other international investors to take a fresh look at Japan. According to Bloomberg, foreign investors bought Japanese equities in 2025 at the strongest pace since 2013, partly driven by demand for a non-US alternative amid uncertainty around US economic policy. That inflow has created a virtuous cycle where rising prices attract more attention, which brings in more capital, which pushes prices higher still.

A New Political Tailwind

A factor not present in earlier stages of the rally has emerged in 2026: political clarity. Prime Minister Sanae Takaichi led the Liberal Democratic Party to a historic supermajority in the February 2026 snap election, securing over two-thirds of parliamentary seats. Her pro-growth economic agenda — featuring fiscal expansion, tax cuts, and continued corporate regulatory reform — has added fuel to an already strong structural rally. Markets responded sharply, with the Nikkei surging above 57,000 following the election result before hitting a 52-week high of 59,332 in late February.

Is It Too Late to Invest in Japan?

Despite the impressive run, Japanese stocks remain cheaper than their American counterparts by most valuation metrics. The corporate governance reform story also still has room to run — many companies are only in the early stages of implementing the changes the exchange is demanding. Goldman Sachs has described the Japanese stock market as being "in the early stages of a long-running transformation," suggesting there is still a structural case beyond recent price momentum. That said, there are real risks to consider. Japan's demographic challenges are long-term — an aging and shrinking population creates headwinds for domestic consumption. Any significant strengthening of the yen could quickly reverse the earnings boost that exporters have enjoyed. Geopolitical tensions, particularly the ongoing Middle East conflict driving energy prices higher, present a near-term headwind for Japan given its heavy reliance on energy imports — the Nikkei dropped nearly 4% on March 4, 2026 as oil prices spiked. And the Bank of Japan's path toward normalising interest rates introduces further uncertainty.

How to Get Exposure

For international investors interested in Japanese equities, there are several straightforward options. Broad Japan ETFs provide diversified exposure to the market without needing to pick individual stocks. Some are currency-hedged, neutralising the impact of yen movements on returns, while unhedged versions give you both the equity and currency exposure. If you already own a broad international or developed-markets ETF, you likely already have some allocation to Japan, as it is typically one of the largest country weights. Checking your existing fund's Japan allocation before adding a dedicated Japan position helps avoid unintended overconcentration. The key is to approach Japan as a long-term allocation based on structural improvements in the market — not as a short-term trade chasing recent momentum.