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CONTRIBUTORS

Dina Ting, CFA

Head of Global Index Portfolio Management,
Franklin Templeton ETFs

Since Washington and Tokyo recently inked a new landmark trade pact—one that economists suggest could serve as a template for other major trading partners—market optimism was buoyed by the sense that workable agreements with the United States under Trump-era dynamics remain possible. As the details emerged—15% auto‑import tariffs (down from nearly 28%) in return for a US$550 billion Japanese investment pledge into US strategic sectors—Japan’s equity market responded: the Tokyo Stock Price Index (TOPIX) hit a one‑year high, and automakers rallied in the double digits.1

Japanese auto exports to the United States are key to its economy, accounting for nearly 30% of the country’s total exports to the United States last year, at a value of approximately US$41 billion.2 But beyond the initial surge, the value of this deal is seen in how it clears a major uncertainty drag, rotating focus back to fundamentals. Now capital can flow toward strong exporters, companies embracing governance reforms, increasing shareholder distributions and relatively attractive valuations—Japan’s market (as measured by the TOPIX) trades at a forward price-to-earnings ratio (P/E) of approximately 17× versus approximately 24× in the US market (as measured by the S&P 500 Index).3

Macroeconomic tailwinds further underscore Japan’s appeal. Inflation has remained above the Bank of Japan’s (BoJ’s) 2% target for eight consecutive quarters, while wage growth—in the spring Shunto round—reached a 34‑year high at 5.25%.4 The BoJ exited negative interest rates in March and raised its policy rate to 0.25% in July, pointing toward continued normalization, though with caution.

We continue to be encouraged by Japan Inc.’s5 still-improving corporate health. Companies are increasingly returning excess cash to shareholders through buybacks and dividends following Tokyo Stock Exchange directives on capital efficiency—nearly half of top‑tier companies have disclosed cost‑of‑capital initiatives. In April 2025, Japanese companies announced share buybacks exceeding approximately US$22.6 billion in a single month—a significant jump from about US$7.7 billion in April 2024 and setting a new spring record.6

Year-to-date, the MSCI Japan Index is up nearly 15%, outpacing both the S&P 500 (8.5%) and the MSCI World Index (12.2%).7

Meanwhile, innovation is blossoming. Tokyo’s “10×10×10 Innovation Vision” aims to multiply the number of startups, unicorns and public‑private collaborations by 10 within five years. Its Startup Development Five‑Year Plan targets a tenfold increase in startup investment by 2027–2028. And ecosystem traction is clear: participation at Asia’s premier SusHi Tech Tokyo event jumped nearly 42%8 year‑over‑year—underscoring robust momentum.

Combined together, easing trade tensions, policy‑led reflation, corporate governance gains and rising startup energy create a uniquely constructive narrative. For investors seeking non‑US equity diversification, now could be a well‑timed window to consider targeted allocation to Japan via broad‑market exchange-traded funds.

Endnotes

  1. Source: Bloomberg, as of July 24, 2025. The Tokyo Price Index, referred to as TOPIX, is a capitalization-weighted index that lists all firms in the first section of the Tokyo Stock Exchange. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
  2. Source: “Japanese automakers respond positively to 15% tariff.” Yomiuri Shimbun. July 24, 2025.
  3. Source: Bloomberg, as of July 25, 2025.  The Tokyo Price Index, referred to as TOPIX, is a capitalization-weighted index that lists all firms in the first section of the Tokyo Stock Exchange. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
  4. Source: “Japan’s 2025 Wage Talks Conclude with Highest Gain in 34 Years.” Economic Central Banks. July 3, 2025. Shunto, also known as the "spring labor offensive," is an annual Japanese tradition where labor unions negotiate with management over wages and other compensation for the upcoming fiscal year.
  5. Japan Inc. is a term describing Japan's highly centralized economic system and development strategy, characterized by a strong alliance between the government and corporations.
  6. Source: “Share Buybacks Resolved in April Exceeds JPY3.5 Tn, Continuing to Support Supply-Demand Balance.” Quick. May 14, 2025.
  7. Source: Bloomberg, as of July 24, 2025. The MSCI Japan Index is designed to measure the performance of the large- and mid-cap segments of the Japanese market. With 183 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. The MSCI World Index captures large- and mid-cap representation across 23 developed markets countries. With 1,325 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
  8. Source: “SusHi Tech Tokyo 2025 Finalized Participant Numbers.” SusHi Tech Tokyo 2025.

 

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