Crisis-tested, reform-driven: The case for Japan now

• Japan has rebounded swiftly, with equities returning to pre-war levels and delivering ~14% YTD gains, reinforcing its role as a resilient market amid the Middle East-driven energy shock.

• Energy resilience is deeply structural, supported by one of the largest strategic oil reserve buffers globally and a diversified energy mix, limiting downside risk from sustained oil price spikes.

• Monetary policy normalisation is firmly underway, underpinned by durable wage growth. While near-term rate hikes may be delayed by geopolitical uncertainty, the direction is clear, with policymakers retaining scope to tighten, particularly to support the yen.

• Corporate governance reform remains in its early innings, with only 15–20% completed, leaving substantial room for further equity re-rating as capital discipline improves.

• Japan offers downside protection if geopolitical tensions persist, and meaningful upside if oil prices ease. Our view is clear – Japan is a market to own now, not later.

With a two-week ceasefire between the US and Iran now in place, and a second round of talks expected this week, Japanese equities have moved back onto investors’ radar. The market has already retraced to near pre-war levels, lifting year-to-date gains to around 14%.

Our call to position in Japan as a resilient, defensive market on 2 April 2026 has played out quickly, within less than two weeks.

Related article: Japan is prone to oil shocks, but less than you might think. Don’t panic!

That said, the ceasefire remains fragile. The issues that derailed earlier negotiations have not been resolved, and US military blockades are now in place. While President Trump has suggested the war is “close to over”, the outcome of the next round of talks remains uncertain.

We do not rule out the possibility of a positive resolution, but importantly, our investment case for Japan does not depend on it. Instead, it rests on three structural pillars now converging: energy resilience, monetary policy normalisation, and corporate governance reform.

Japan’s energy resilience is structural, not circumstantial

Japan holds 254 days of strategic oil reserves, the largest buffer among developed economies and well above the IEA’s 90-day requirement. Japanese government estimates suggest oil prices would need to rise to around USD175 per barrel and stay there for a prolonged period before tipping the economy into recession. Even with the recent spike, oil price remains far from that threshold. Sustaining such extreme prices would likely require a far more severe escalation in the Middle East than current diplomatic signals imply.

This resilience was not built overnight. It is the product of five decades of deliberate policy, born directly from the trauma of the 1973 oil shock that pushed Japan into its first post-war recession. Since then, Japan has aggressively diversified its energy mix into liquefied natural gas, driven energy efficiency to world-class levels, and embedded emergency response mechanisms into both government and private industry. Today, Japan ranks among the most energy-efficient economies in the developed world on a per-capita basis.

In addition, 15 nuclear reactors are now operational, providing a growing source of domestic, non-Gulf-dependent energy. The accelerated nuclear restart programme represents a multi-year structural reduction in import dependence.

Oil spikes will create economic strain through higher import costs, margin pressure, and inflation. But moving from strain to crisis requires sustained extremes that current conditions do not support.

Monetary policy normalisation is firmly underway

Japan’s policy regime is undergoing a historic shift. After decades at or below zero, the Bank of Japan raised rates to 0.75% in December 2025, a 30-year high.

Crucially, the long-awaited conditions for policy tightening are now in place: a third consecutive year of ~5% wage growth from the 2026 Shunto negotiations, alongside sustained positive real wage growth in January (0.7% YoY) and February (1.9% YoY)  2026.

The Middle East-driven oil shock has added complexity. In his 13 April remarks, the Governor of Bank of Japan (BOJ) Kazuo Ueda adopted a more cautious tone, highlighting geopolitical uncertainty and the potential drag on the pace of rate hikes. As a result, expectations for an immediate April move have eased.

However, the direction of travel is unchanged. The BOJ now estimates the neutral rate at 1.1%–2.5%, implying significant room for further tightening from current levels.

At the same time, currency dynamics reinforce the case. The yen remains near five-year lows (USD/JPY ~158), increasing imported inflation pressures. Policymakers, including Economy Minister Ryosei Akazawa, have signalled that rate hikes remain a viable tool to stabilise the currency and tame import inflation. Despite the recent weakness, we maintain a modestly constructive view on the yen. Downside risks appear limited, with levels around 160 acting as a key threshold that has historically triggered policy intervention. At the same time, the currency has room to appreciate, supported by its role in moderating imported inflation, the gradual unwinding of carry trades, and the potential to attract renewed foreign capital into Japanese equities.

To position for this, we see unit trusts with unhedged share classes as particularly attractive, as they offer the opportunity to capture both underlying equity returns and any upside from yen strength.

The bigger picture: Japan's structural story is just getting started

Since the Tokyo Stock Exchange’s landmark reform push in March 2023, urging companies to focus on cost of capital and share price, the impact has been clear and measurable. Prime Market price-to-book ratios have risen from 1.2x to 1.5x as of March 2026. Share buybacks have accelerated, and the long-standing web of cross-shareholdings is steadily being dismantled. Notably, Japan’s three largest insurers have committed to fully exiting these positions.

According to the CEO of Japan Exchange Group, Hiromi Yamaji, the reform process is only “15–20% complete.” The bulk of the corporate governance re-rating still lies ahead.

The next phase is already underway. The Corporate Governance Code, now in its third major revision, places greater emphasis on capital allocation discipline. Boards will be required to clearly justify excess cash holdings and articulate how balance sheets support growth and shareholder return. At the same time, reforms targeting the Standard and Growth markets aim to strengthen the post-IPO ecosystem.

The direction is clear: regulatory pressure to deploy capital, through dividends, buybacks, wages, and investment, is becoming structural. This is a multi-year driver of equity value, independent of short-term movements in oil prices.

The investment case for Japan: buy now

The US–Iran ceasefire has bought time. Diplomacy is progressing, slowly and imperfectly, but moving forward. President Trump has signalled that he views the conflict as largely resolved, and has clear political incentives to secure a deal rather than allow tensions to drag on. If the next round of talks delivers even a partial breakthrough, oil prices could ease further. The recent sell-off in Japan may prove to be exactly what it looks like: short-term noise creating long-term opportunity.

But even if geopolitical uncertainty lingers, Japan’s investment case does not hinge on oil markets. It rests on structural forces already in motion - corporate governance reforms that are only 15–20% complete, wage growth that is becoming durable, a central bank steadily exiting ultra-loose policy, and a corporate sector with significant cash reserves increasingly under pressure to deploy capital.

In short, if the war ends, Japan's structural advantages in governance reform and wage growth compound without the energy headwind. If the war continues, Japan's energy resilience is the most valuable defensive quality in Asia. In both scenarios Japan wins.

Our view is clear - this is a market to own now, not later.

Table 1: Recommended products for Japanese equities

Category	Products
UT	Eastspring Investments - Japan Dynamic AS SGD
ETF	Xtrackers Nikkei 225 UCITS ETF 1D (LSE: XDJP)

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.