Chaos and Order

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Introduction: The End of the Lost Three Decades?

The Japanese stock market has long been symbolized by the phrase the lost three decades. It took decades to recover the peak reached at the end of 1989, and during that span the Japanese economy struggled to climb out of the swamp of deflation and low growth.

Yet over the past few years the mood has changed. Wages have risen, prices have climbed gently, and as companies embrace governance reform the eyes of overseas investors have begun to turn toward Japan. Assessments emerged that the Japanese market had recovered its historic highs and entered a new phase.

To understand the 2026 Japanese stock market, three large currents must be viewed together. The first is the change in macro structure represented by the escape from deflation. The second is the change in micro structure represented by corporate governance reform. The third is the currency variable of the yen and Bank of Japan policy.

This article examines these three currents in turn, then addresses key sectors, foreign capital, and the currency variable that Korean investors in particular must consider. It also presents the bull case and the bear case in a balanced way, and organizes the risks and checkpoints investors should monitor. Because Korea's Value-Up program is said to have referenced Japan's governance reform, the Japanese experience serves as a meaningful reference case for Korean investors as well.

This article is written for informational and educational purposes and is not investment advice recommending the purchase or sale of any specific security. Investment decisions and their consequences rest entirely with the individual, and if needed you should consult a qualified professional. The figures and forecasts that appear in the text are based on reporting and institutional analysis; they may change over time and may prove wrong, a point worth noting in advance.

Background of the Re-rating: Wages, Prices, Governance

Behind the re-rating of the Japanese market lie three structural changes.

The Return of Wage Growth

For a long time, wages in Japan barely rose. Companies controlled costs, households closed their wallets, and as a result a vicious cycle of deflation took hold in which demand contracted. Recently, however, as meaningful wage increases have continued, centered on large companies, the possibility of breaking this cycle has come up for discussion.

When wages rise, the purchasing power of households grows, and this can lead to a gentle rise in consumption and prices. The transition from deflation to mild inflation is positive for corporate pricing power and nominal growth.

The key question, however, is whether wage growth spreads beyond a handful of large companies to small and medium enterprises and to non-regular workers. Wage increases must spread widely for the consumption capacity of households as a whole to grow, and only then can the escape from deflation take root as a trend across the whole economy. The degree of this spread can be gauged from the results of the wage negotiations held every spring.

The Normalization of Prices

What plagued Japan for decades was not inflation but deflation. In an environment where prices do not rise or actually fall, companies find it hard to raise prices, nominal revenue stagnates, and the incentive for investment and wage increases weakens.

The settling-in of mild inflation can change this structure. When companies become able to raise prices, revenue and profits grow, and this becomes the foundation for a re-rating of share prices.

But if inflation runs too fast or arises only from the cost side, it can backfire. Inflation driven by rising import prices erodes the real purchasing power of households and increases the cost burden on companies. What matters, therefore, is not the existence of inflation itself, but whether it is a healthy form of price increase supported by wage growth. Only when a virtuous cycle of wages and prices rising together takes hold does the escape from deflation acquire real meaning.

Governance Reform

The third pillar is corporate governance reform. The Tokyo Stock Exchange has strengthened pressure on companies whose price-to-book ratio falls below one, in the direction of demanding improved capital efficiency and stronger shareholder returns. This is also cited as the model that Korea's Value-Up program referenced.

The reason governance reform matters is that it is not a mere share-price boosting measure but an attempt to change the constitution of the capital market itself. For a long time, Japanese companies were criticized for hoarding cash and managing capital inefficiently. As changes such as share buybacks and expanded dividends, the reduction of cross-shareholdings, and strengthened board independence accumulate, capital efficiency rises and return on equity improves, and this becomes the basis for a re-rating.

There is also a risk, however, that reform stops at the level of form. If disclosures increase but actual capital allocation does not change, the trust of the market is hard to sustain for long. That is why investors must track changes in actual figures rather than declarations.

The Three Drivers of Japan's Re-rating

Wage growth ──┐

├──► Nominal growth recovery ──► Corporate profit gains

Price norm. ──┘ │

▼

Governance reform ──► Stronger returns ──► Share-price re-rating

Key: The re-rating is most persuasive when all three work at once

The Yen and the Bank of Japan: A Two-Faced Currency

When discussing the Japanese market, the yen and Bank of Japan policy cannot be left out. The direction of the yen affects both the earnings of Japanese companies and the returns of foreign investors.

The Two Sides of a Weak Yen

A weak yen is good news for Japanese exporters. Selling the same product yields larger revenue and profit when converted into yen. Companies with a high export share, such as autos, machinery, and electronics, benefit from the weak yen.

A weak yen also increases the number of foreign tourists visiting Japan, bringing vitality to tourism and part of domestic demand. Thanks to the cheaper yen, when travel to and spending in Japan rise, related industries such as retail, hotels, and transportation can benefit. In this way the direction of the yen affects each industry differently, so it is hard to say uniformly that it is good or bad.

But a weak yen also has its shadows. As import prices rise, the burden grows for domestic-demand companies and households that depend on energy and raw materials. In addition, from the standpoint of foreign investors, a weak yen can lead to currency losses, so that even when share prices rise, the return converted into a foreign currency shrinks.

The Bank of Japan's Path to Normalization

For a long time the Bank of Japan maintained an ultra-accommodative monetary policy. Negative interest rates and large-scale asset purchases were tools for fighting deflation. But in an environment where prices are normalizing, the possibility of policy normalization, that is, rate hikes, comes up for discussion.

Policy normalization is a double-edged sword. When rates rise, the yen can turn stronger, becoming an opportunity for currency gains for foreign investors, but at the same time the exporters' benefit from the weak yen diminishes and the interest burden on government bonds grows.

Japan in particular is a country with a large national debt, so rising rates could greatly increase the government's interest burden. For this reason many observe that the Bank of Japan will pursue policy normalization very cautiously and gradually. A sudden rate hike could shock the market, while conversely a normalization that is too slow could entrench a weak yen, so the Bank of Japan finds itself having to strike a delicate balance.

| --- | --- | --- | --- |

Key Sectors: Where to Look

Let us examine the sectors drawing attention in the 2026 Japanese market. The breakdown below reflects what is generally discussed and is not a recommendation of specific securities.

| Sector | Characteristics | Key variable |

| --- | --- | --- |

| Autos and parts | Global export competitiveness, electrification | Yen, US tariff policy |

| Semiconductor equipment and materials | Core of the global supply chain | AI investment cycle |

| Machinery and robots | Automation demand, industrial robots | Global capital expenditure |

| Financials | Candidate beneficiary of rate normalization | Bank of Japan policy |

| Trading houses and conglomerates | Resources, trade, dividends | Commodity prices, returns |

| Domestic demand and consumption | Beneficiary of wage growth | Real income recovery |

The semiconductor equipment and materials field in particular is directly linked to the global AI investment cycle. The global semiconductor volatility of June 2026 also affected the share prices of related Japanese companies. The financial sector, meanwhile, is cited as a candidate to benefit from improved net interest margins if rate normalization proceeds.

The auto sector is an industry that serves almost as a symbol of Japanese exports. In a phase of yen weakness its price competitiveness rises, but it is exposed to structural variables such as the transition to electrification and US trade policy. If the shift to the electric vehicle era proceeds rapidly, the key question is whether the traditional leaders can adapt to the new competitive environment.

The machinery and robots sector is a field that benefits from global automation demand. Population decline and rising labor costs are cited as factors that structurally underpin automation demand. But if global capital expenditure slows, the order books of these companies can contract along with it.

The domestic-demand and consumption sector is a direct candidate beneficiary of wage growth. When real income rises, the consumption capacity of households grows, and this can flow through to the earnings of domestic-demand companies. It serves as a barometer for gauging whether the escape from deflation is taking root as a real change.

Foreign Capital: The Engine of the Re-rating

In the re-rating of the Japanese market, the role of foreign capital is large. As global investors focused on the undervaluation appeal of Japanese assets and on governance reform, there is analysis that inflows into Japan drove the re-rating.

There were also reports that interest in the Japanese market grew even higher as cases of prominent investors investing in Japanese trading houses became known. Foreign capital, however, reacts sensitively to global risk appetite and exchange rates, so it is hard to assume that inflows are permanent.

It is also important to distinguish the nature of foreign capital. Capital that is long-term in character and capital seeking short-term gains have different effects on the market. If long-term capital flows in on the basis of trust in structural reform, it becomes a firm foundation for the re-rating, but inflows led by short-term capital can quickly change direction when the global environment shifts.

The gap between home-currency returns and foreign-currency-converted returns also governs the behavior of foreign capital. Even if Japanese share prices rise, if the yen weakens, the return converted into another currency shrinks. For this reason the foreign supply-and-demand picture in the Japanese market is tightly linked not only to share prices but also to the exchange-rate outlook.

The virtuous cycle of foreign inflows (when working)

Governance reform → return expectations → foreign buying

▲ │

│ ▼

Re-rating sustained ◄── price gains ◄── better flows

But if the exchange rate worsens or global risk-aversion appears,

this cycle can run quickly in reverse

A Korean Investor's Perspective: The Exchange Rate Is Central

When a Korean investor invests in Japanese stocks or Japan-related products, the additional variable of the exchange rate must be considered without fail. For a Korean investor, the final return is determined not only by the rise and fall of Japanese share prices but also by the movement of the won-yen rate combined together.

For example, even if Japanese share prices rise, if the yen weakens against the won, the return converted into won can shrink. Conversely, if the yen strengthens against the won, a currency gain can be added.

A Korean investor's return on Japanese stocks

Final return (won) = Japan share-price return + won-yen move

Yen strength (vs won) → currency gain → return boosted

Yen weakness (vs won) → currency loss → return eroded

So in Japan investing, which currency phase you are in

matters as much as which company you pick

Whether the yen is hedged, the investment horizon, and the outlook for Bank of Japan policy can change the strategy. Because the exchange rate is an area that is very hard to predict, a perspective that recognizes and manages exchange-rate movement as a risk is needed rather than betting on the exchange rate.

The Bull Case and the Bear Case

Views also diverge on the 2026 Japanese market.

| Category | Bull case | Bear case |

| --- | --- | --- |

| Macro structure | Deflation escape and nominal growth recovery | Inflation settling is uncertain |

| Governance | Reform leads to shareholder returns | Concern it stops at formal improvement |

| Yen | Friendly to foreigners on normalization | Volatility of the policy turn |

| Valuation | Still undervalued and attractive | Much of the re-rating has happened |

| Foreign capital | Structural inflows continue | Vulnerable to global risk-aversion |

The bull case takes as its core grounds the structural transition of the escape from deflation and the continuation of governance reform. If the nominal profits of Japanese companies grow and shareholder returns strengthen, the argument goes, there is room for further re-rating.

The bear case points to the uncertainty of inflation settling in, the volatility that accompanies a policy turn, and a re-rating that has already largely run its course. If the good news is already reflected in share prices, the view holds, the room for further gains may be limited.

The Trading House: A Distinctive Model

When discussing the Japanese market, the trading house cannot be left out. The trading house is a uniquely Japanese form of company that spans resource development, trade, logistics, investment, and more. It is sensitive to global resource prices and trade flows, but at the same time it has drawn attention for its stable dividends and diversified profit structure.

As cases of a prominent overseas investor investing in Japanese trading houses became known, these companies were sometimes cited as a symbol of the Japanese market's re-rating. The appeal factors and risks of trading houses can be organized as follows.

| Factor | Appeal | Risk |

| --- | --- | --- |

| Business diversification | Risk spread across many fields | Hard to value due to complexity |

| Resource exposure | Benefit from rising commodity prices | Earnings swing when prices fall |

| Shareholder returns | Stronger dividends and buybacks | Driven by the resource cycle |

| Global network | Trade and investment opportunities | Geopolitical and currency exposure |

Trading houses are frequently cited as a case that shows the trend of Japanese governance reform and stronger shareholder returns. But because they are exposed to the commodity-price cycle, one must note that earnings can wobble if the resource economy turns down.

What Korean Investors Should Examine More Deeply

When Korean investors take an interest in the Japanese market, they need to examine a few things more deeply, not simply the exchange rate.

The first is the difference in industrial structure. Japan has strong competitiveness in traditional manufacturing such as autos, machinery, and materials, and while it competes with Korea in some industries, it stands in a complementary relationship in other areas. The second is the stage of governance reform. Because Japan's reform began earlier than Korea's Value-Up, the Japanese experience can serve as a reference case for gauging the future of the Korean market.

A lens for comparing the Korean and Japanese markets

Korea Japan

Governance Value-Up early stage Reform under way

Currency Won-dollar Yen-dollar + won-yen

Industry Semiconductor focus Diversified manufacturing

Re-rating Whether it proceeds Much already done

Key: Japan's experience suggests both the

possibilities and limits of Korea's Value-Up

The third is the investment vehicle. One can invest directly in individual Japanese stocks, or use an exchange-traded fund that tracks the Japanese market or a specific theme. Because exchange-rate exposure differs depending on whether the fund is hedged, it is important to choose carefully a vehicle that suits one's own investment purpose and risk appetite.

A Long-Term View: The Durability of Structural Reform

What governs the long-term outlook for the Japanese market is, in the end, the durability of structural reform. The key question is whether the normalization of wages and prices and governance reform settle in structurally rather than stopping at a temporary phenomenon.

Japan, like Korea, faces the challenges of aging and population decline. Offsetting the decline in the labor force with automation and productivity gains, and continuously improving corporate capital efficiency, are the conditions for long-term growth. If these currents continue, the re-rating of the Japanese market has room to go further, but if the currents waver, the re-rating can also halt.

Long-term variables for the Japanese market

[ Positive factors ] [ Negative factors ]

Wage-price normalization Inflation settling uncertain

Governance reform continues Concern over formal change

Productivity gains Burden of population decline

Key: The long-term outlook hinges on the durability of reform

Risks and Checkpoints

The risks to monitor when tracking the 2026 Japanese market are as follows.

1. Bank of Japan policy: the pace of rate normalization and market shocks

2. Direction of the yen: the effect of yen strength or weakness on earnings and flows

3. Global economy: the external exposure of an export-dependent Japanese economy

4. Governance implementation: whether reform leads to real shareholder returns

5. US trade policy: the tariff variable on major exports such as autos

6. Global semiconductor cycle: the effect on equipment and materials companies

Japan market check list

[ ] Bank of Japan: outcome of the rate-policy meeting

[ ] Yen: dollar-yen and won-yen rate trends

[ ] Wages: results of spring wage negotiations

[ ] Prices: consumer price inflation rate

[ ] Governance: buyback and shareholder-return disclosures

[ ] Foreign flows: weekly trading trends

The Link to Global Macro

The Japanese market, too, is tightly linked to the global macro environment. US monetary policy, the global AI cycle, and the trade environment in particular have a direct effect on the Japanese market.

US Rates and the Yen

The interest-rate gap between the US and Japan is the core factor governing the yen. When US rates are high and Japanese rates are low, downward pressure on the yen grows, and conversely when that gap narrows, the yen can turn stronger. According to reports, the June meeting of the US Federal Reserve drew attention, and strong employment data brought up policy flexibility. The US rate path transmits to the Japanese market through the yen.

The AI Cycle and Japanese Semiconductors

The global semiconductor volatility of June 2026 also affected Japan's semiconductor equipment and materials companies. Japan occupies a core position in the semiconductor supply chain, so it is sensitive to the flow of the global AI investment cycle. When AI investment is firm, related Japanese companies benefit, but when the cycle turns down, they wobble along with it.

The Trade Environment

The Japanese economy has a high export dependence, so it is vulnerable to the global trade environment. US tariff policy on flagship exports such as autos in particular is an important variable for Japanese corporate earnings. If a protectionist stance strengthens, the burden on exporters can grow.

How global macro transmits to the Japanese market

US rates ──► US-Japan rate gap ──► Yen ──► Exporter earnings

│

AI cycle ──► Global semiconductors ──► Japan equipment/materials

│

Trade policy ──► Tariffs ──► Auto and other export stocks

▼

Nikkei index

Key: Through the three channels of currency, AI, and trade,

global variables transmit to the Japanese market

Viewing 2026 Through Scenarios

Let us sketch 2026 for the Japanese market through several scenarios. These are not categorical forecasts but thought experiments for understanding the interaction of variables.

Scenario A: The Bull Scenario

In this scenario the normalization of wages and prices continues firmly, and governance reform connects to a real expansion of shareholder returns. The Bank of Japan normalizes policy gradually, and the yen turns mildly stronger, offering foreign investors an opportunity for currency gains. In this case the re-rating current can continue further.

Scenario B: The Neutral Scenario

In this scenario wages and prices rise gently but without clear acceleration. Governance reform proceeds gradually, and the yen moves without a clear direction. The market differentiates by sector and by stock, and the overall index shows a gentle trajectory.

Scenario C: The Bear Scenario

In this scenario inflation fails to settle in, or conversely a sudden policy turn shocks the market. A global slowdown hits exports, and US trade policy burdens flagship industries such as autos. Profit-taking pressure on a re-rating that has already happened can be added.

| --- | --- | --- | --- | --- |

Sketching in advance how your own portfolio would react in each scenario is far more useful than trying to nail a categorical forecast.

Frequently Asked Questions

Let us organize the questions that come up frequently about the Japanese market. The answers below are general explanations and not recommendations of specific securities.

First, the Japanese market has already risen a lot, isn't it too late? It is true that the re-rating has largely proceeded. But the view that there is further room if structural reform continues and the view that the good news is already reflected coexist.

Second, is a weak yen good or bad for Japan investing? It is good news for exporters but a burden for domestic demand and for foreign returns. For Korean investors it is a complex matter that must also factor in the won-yen rate.

Third, what effect does a Bank of Japan rate hike have on the market? Normalization can be friendly to financial stocks, but yen strength can be a burden for exporters. The pace and magnitude are the key.

Fourth, what is the best way for a Korean investor to invest in Japan? There is no single right answer. It is important to choose among individual stocks, exchange-traded funds, and whether to hedge currency, in a way that suits one's own purpose and risk appetite.

Lessons from History

The history of the Japanese market is itself a powerful lesson. The enormous asset bubble of the late 1980s and its collapse, and the decades of stagnation that followed, are a representative case showing what excessive optimism can lead to. At the time Japanese stocks and real estate soared sky-high, and many believed the rise would last forever.

There is a lesson on the opposite side as well. The re-rating that arrived after a long stagnation suggests that opportunity can lie latent precisely when the market is sunk in despair. The key is a sense of balance that is swept away by neither mania nor fear.

The historical cycle of the Japanese market

1980s Formation of an enormous bubble

1990s Bubble collapse, start of long stagnation

2000-2010 The lost era

Recent Attempts at structural reform and re-rating

Key: Neither mania nor despair lasts forever, and

opportunity and risk coexist at the opposite extreme

This history offers implications for viewing the 2026 Japanese market as well. Neither chasing unconditionally because a re-rating has proceeded, nor turning away unconditionally while recalling only the past stagnation, is a balanced attitude. What is needed is a stance of judging while confirming the substance and durability of structural reform with data.

Summary: Three Questions

The discussion of the Japanese market can be compressed into three questions.

1. Is the escape from deflation structural? The key is whether the normalization of wages and prices is a sustained trend rather than a temporary phenomenon.

2. Is governance reform substantive? One must see whether improved capital efficiency and shareholder returns appear as figures, not as form.

3. How does the currency environment move? The Bank of Japan's policy normalization and the direction of the yen govern earnings and foreign flows.

A Korean investor must add a fourth variable here: the won-yen rate. Steadily monitoring the answers to these questions is the path to not being swayed by fragmentary news.

Investment Horizon and Risk Management

When investing in the Japanese market too, it is important to make the investment horizon clear. In the short term, volatility from the yen and Bank of Japan policy is large, but in the long term the durability of structural reform is the more important variable.

| Horizon | Variable to watch | Point of caution |

| --- | --- | --- |

| Short term | Yen, policy meetings, flows | Difficulty of predicting the rate |

| Medium term | Earnings, governance progress | Uncertainty over reform pace |

| Long term | Deflation escape, productivity | Patience for short-term volatility |

For Korean investors, the layer of the won-yen rate is added here. Because the exchange rate is an area that is very hard to predict, a perspective that manages exchange-rate movement as a risk, including whether to hedge, is recommended over betting on the rate. The core of risk management is investing within a tolerable level, and this is a principle that does not change in any market.

Closing: Is the Structural Transition Genuine?

The 2026 Japanese market is a market attempting a structural transition, emerging from the shadow of the lost three decades. If the currents of wage-and-price normalization and governance reform lead to genuine change, there is hope that the re-rating of the Japanese market can go further.

But at the same time the currency variables of the yen and Bank of Japan policy, and the external variables of the global economy and the trade environment, are ever-present. A Korean investor must not forget that another layer, the exchange rate, is added here.

In the end, the future of the Japanese market hinges on two axes: the substance and durability of structural reform, and the flow of the currency environment. Rather than concluding firmly in one direction, the wise stance is to keep tracking changes in the data and maintain a balanced judgment.

Let me emphasize once more. This article is for information and education and is not a recommendation to buy or sell any specific security. All investment decisions and the responsibility that follows rest with the investor, and when a specific judgment is needed you must consult a qualified professional. Market forecasts can always miss, and past performance does not guarantee the future.

Appendix: Key Terms

A brief summary of the main concepts covered in this article.

- Nikkei: one of the representative indices of the Japanese market

- Deflation: a phenomenon in which prices continuously fall

- Governance reform: the trend of improving corporate governance and shareholder returns

- Bank of Japan: Japan's central bank, in charge of monetary policy

- Policy normalization: the process of moving away from ultra-accommodative monetary policy

- Trading house: a uniquely Japanese company spanning trade, resources, and investment

- Currency hedge: a transaction to reduce exchange-rate movement risk

Appendix: Check Tools for Investors to Reference

A summary of general tools an investor can use to check the Japanese market for themselves. These are not recommendations of specific services or securities but methods for confirming information in a balanced way.

- Bank of Japan releases: directly confirm rate policy and the economic outlook

- Exchange-rate indicators: examine dollar-yen and won-yen rate trends

- Corporate disclosures: confirm shareholder-return and buyback disclosures

- Macro indicators: reference wage-negotiation results and the inflation rate

- Hedge check: clarify your own level of exchange-rate exposure

- Investment horizon: distinguish short-term volatility from the long-term trend

- Diversified views: read the bull case and the bear case together

Using these tools helps you avoid being swayed by fragmentary news and confirm the substance and durability of structural reform with data.

References

- Reuters, Japan market and Bank of Japan reporting, https://www.reuters.com

- Bloomberg, yen and market analysis, https://www.bloomberg.com

- CNBC, Asian markets, https://www.cnbc.com

- Yahoo Finance, quotes and indicators, https://finance.yahoo.com

- Wall Street Journal, the Japanese economy, https://www.wsj.com

- Financial Times, Japanese governance reform, https://www.ft.com

- Bank of Japan official materials, https://www.boj.or.jp/en

- International Monetary Fund, World Economic Outlook, https://www.imf.org

- Yonhap News, Japanese economic trends, https://www.yna.co.kr