Global investors are increasingly turning their attention to Japan’s $7.9 trillion stock market. Performance was the defining theme of 2025. For instance, the MSCI Japan Investable Market Index climbed nearly 26% last year, outperforming both the S&P 500 and the Stoxx Europe 600. This momentum has sparked significant interest from international participants, with inflows into Japanese equities from US investors reaching a three-year high.
At Goldman Sachs Asset Management, we engage with clients worldwide who either hold Japanese equities or are weighing an allocation. Here are five questions we believe investors should evaluate as they look toward 2026.
1. What is the near-term outlook for the Japanese economy?
Japan’s economy is currently undergoing a transition. After many years of deflation, consumer price growth is projected to surpass the Bank of Japan’s 2% target in 2025. Interest rates, which the central bank maintained at or below zero for an extended period, are now seeing a gradual increase. Following a contraction in 2024, the economy has returned to growth, albeit at a measured pace.
We observe promising indicators within this shifting landscape. Real disposable income is anticipated to rise moderately over the coming year, supported by faster wage growth that should bolster a consistent recovery in consumption. The outlook for Japan has been strengthened by a July agreement with the US, which established a 15% tariff on the majority of Japanese imports entering the American market. This includes automobiles, which were previously subject to a 27.5% tariff. An additional potential boost comes from the ¥21.3 trillion ($135 billion) tailwinds heading into 2026, such as stabilizing monetary policy, moderating inflation, and ongoing fiscal support from the government. In our view, wage growth will encourage robust consumer spending and corporate capital expenditure, which will in turn drive earnings. We expect corporate governance reforms to continue unlocking shareholder value through higher dividends and share buybacks. Total buybacks are currently on track to reach approximately ¥18 trillion in 2025, more than double the levels observed prior to the pandemic.
Japanese corporate earnings per share (EPS) saw growth of about 2% annually between 2008 and 2019. Since that time, the rate of annual EPS growth has climbed to 8%, bolstered by stronger nominal growth. We project EPS to grow by 8% to 9% in 2026.
3. What should international investors keep in mind when considering Japanese equities?
Beyond the large, established firms that comprise Japan’s prime equity market—such as well-known entities like Toyota, Sony, and Nintendo—Japanese companies can be challenging for international investors to evaluate for two primary reasons. First, analyst coverage of Japanese firms is limited compared to the US and Europe. For example, the MSCI Japan Index has a market-cap weighted average of 18 analysts per company, whereas the S&P 500 averages 45.
The second factor involves the prevalence of the Japanese language within the equity market. While 94% of large-cap companies report their earnings in English, the figure for the broader Japanese equity market is only 54%, as English-language disclosures are significantly less common among small- and mid-cap firms. Consequently, nearly half of the Japanese equity market remains less accessible to non-Japanese investors.
4. How can an Alpha Enhanced approach help investors overcome these informational challenges?
The Alpha Enhanced strategy for equity investing is designed to improve passive portfolios while maintaining beta exposure. It integrates a risk-managed, alpha-seeking component, enabling investors to utilize their portfolio risk budget with greater efficiency. The flexibility of the Alpha Enhanced approach allows investors to pursue outperformance, diversify risk, and optimize fee budgets in alignment with their specific goals.
Complex and less transparent markets may provide structural advantages for an Alpha Enhanced equity strategy centered on a systematic, data-driven stock-selection process. By utilizing a quantitative engine, Alpha Enhanced strategies may possess an advantage in gathering and analyzing alternative data that can be instrumental in identifying opportunities and assessing risk within Japanese equities. For example, Japan produces more patents than most developed nations, yet the vast majority of these applications are in Japanese. This extensive, restricted data source could potentially broaden the alpha opportunity set for quantitative investors.
5. What potential benefits does the active ETF vehicle offer to investors in Japanese equity markets?
Actively managed exchange-traded funds integrate the advantages of active management—such as risk management and alpha potential—with the cost-effectiveness, transparency, and trading ease inherent in the ETF structure. The versatile solutions provided by active ETFs may assist investors in capturing opportunities within less efficient markets where information is harder to obtain. Active ETFs that utilize an Alpha Enhanced approach to Japanese equities may enable investors to pursue alpha in a risk-controlled manner while leveraging the informational edge provided by systematic stock selection.
