Japan's stock market in new splendor

For the first time in decades, assets from private Japanese households are also flowing into the stock market again. According to the stock exchange operator Japan Exchange Group, households are already the second-largest trading group on the stock market after foreign investors, and the number of shareholders is at its highest level since the late 1980s.

Japanese private investors, who traditionally preferred savings accounts or fixed-term deposits, are gradually discovering shares and funds as instruments for long-term wealth accumulation. A key trigger was the reform of the NISA system. The NISA system (Nippon Individual Savings Account) is a government incentive program that allows private investors to keep income from shares and funds tax-free within certain limits. Since the revision at the beginning of 2024, the investment limits have been increased and the time limit on tax relief has been lifted. The number of accounts has risen sharply since then and now stands at over 20 million (The Wall Street Journal, 10.10.2025).

For many Japanese people, it is gradually becoming clear that if prices rise but interest rates on savings accounts barely keep pace, they will lose purchasing power. Investing is therefore becoming increasingly necessary. Many Japanese companies are also offering new or increased benefits and discounts in kind for shareholders. Although such gifts do not replace dividends, they lower the inhibition threshold for the first step onto the stock market.

In view of the high valuations on the US stock markets, some investors are also looking for alternatives in other regions. While the leading US index S&P® 500 was trading at a price/earnings ratio (formula: P/E ratio = share price/earnings) of around 28 at the end of October 2025 (Bloomberg, 31.10.2025), Japanese stocks continue to be valued more favorably as measured by the broader Topix index. For the Topix, the P/E ratio based on earnings estimates as at 31.10.2025 is around 19 (Bloomberg, 31.10.2025).

For some years now, Japan has also been trying to make its corporate landscape more shareholder-friendly. The Tokyo Stock Exchange is trying to encourage companies to make better use of inefficient capital and improve corporate governance. Many corporations have traditionally sat on ample cash cushions and shied away from debt almost as a matter of principle. This restraint was long regarded as a sign of stability, but from the point of view of international investors it meant a lot of tied-up capital and little return. Gradually, however, a rethink is taking place. Dividend payouts and share buybacks have increased in recent years. The increase in buyback programs has been particularly strong, almost doubling since 2023 (Daiwa Asset Management, 27.10.2025). Nevertheless, payout ratios remain low by international standards, as many companies continue to hold high cash reserves.

However, the mood of optimism on the stock market contrasts with another development: yields on long-term Japanese government bonds rose to rarely seen heights at the beginning of October 2025, as investors fear that additional fiscal stimulus would have to be financed by more debt (The Wall Street Journal, October 6, 2025). At the same time, the yen has weakened since the beginning of October, falling below the 150 yen per US dollar mark. A government that wants to stimulate the economy with higher spending is thus facing a central bank that is reluctant to raise interest rates. This combination, together with a weak yen, could strengthen exporters. However, the downside of these developments should not be ignored. If the new government's expansionary fiscal policy is met with sustained price pressure, yields at the long end of the Japanese bond market could rise further. This could be problematic for a country with a national debt of over 200 percent of GDP.