A domestic investment cycle could bring Japanese capital back onshore and support the yen.
Rising nominal growth and demand for capital could benefit financials and industrials.
The opportunity is a multi-year structural shift in our view, not a near-term trade.
For much of the past three decades, Japanese capital has flowed overseas, drawn by stronger nominal growth and more attractive returns in other markets. But that dynamic may be changing.
A new cycle of domestic investment and reflation could pull capital back onshore, support the yen, and create opportunities across capital-intensive sectors, such as defense, AI infrastructure, and broader industrials and financials. A stronger currency would lower the cost of Japan’s food and energy imports, helping ease pressure on household purchasing power.
The result could be an investment environment that looks very different from the Japan of the past 30 years.
The Resources to Invest
An important starting point is Japan’s position as a significant net creditor. The country has substantial financial assets that can help finance an expansion in domestic capital spending.
Japan Has the Resources to Fund Domestic Investment
Japan’s net creditor position, supported by substantial household financial assets, provides a potential source of funding for a new capital spending cycle.
Source: Japanese Cabinet Office, as of January 2024.
Those resources are not evenly distributed. The government and corporate sectors are debtors, while much of Japan’s financial wealth resides with households. But taken together, the country has considerable capacity to fund investment internally.
Policymakers are pushing for greater investment across a wide range of strategic areas. Japan’s consensus-driven policymaking process can be slow, but once priorities are established, implementation tends to be swift and successful.
For investors, the question is where that capital ultimately goes—and which companies are positioned to benefit.
Bringing Capital Back Home
In recent decades, Japanese corporations and pension funds have invested heavily abroad, in part because interest-rate differentials and stronger nominal growth made overseas markets more attractive.
A sustained domestic reflation and investment cycle could begin to reverse that pattern. As investment opportunities improve at home, more corporate and institutional capital could remain in Japan or return from overseas, and that repatriation could provide structural support for the yen.
The potential impact extends beyond currency markets. Japan imports the vast majority of its fossil fuels and is also a significant food importer. A stronger yen would reduce the local cost of those imports, helping alleviate some of the pressure higher prices have placed on household purchasing power.
In that sense, the thesis forms a reinforcing cycle: domestic investment draws capital home, capital repatriation supports the yen, and a stronger yen helps improve consumers’ real purchasing power.
A Different Opportunity for Equity Investors
This changing backdrop could also reshape the Japanese equity market. Historically, it has behaved differently from other developed equity markets, tending to be more value-oriented, and traditional factor models have not always worked in the same way they do elsewhere. But that may be changing as Japan moves toward a more conventional environment of stronger nominal growth, rising demand for capital and higher interest rates.
Financials are among the clearest potential beneficiaries, in our view, but the opportunity extends well beyond financials.
Financials are among the clearest potential beneficiaries, in our view. Greater demand for capital and higher rates could create a more supportive environment for banks and the financial sector broadly.
But the opportunity extends well beyond financials. Japanese companies play important roles throughout global industrial and technology supply chains, including in many of the areas attracting substantial investment today. Potential beneficiaries span AI and technology infrastructure; robotics; defense; energy and infrastructure; nuclear power; software; and electrical and electronic technology and components.
Japan’s industrial base makes the country a significant supplier and component manufacturer across many of these areas. As domestic investment accelerates, those capabilities may become increasingly important at home as well as abroad.
This differs from the Japan story of recent decades. In the past, many of the country’s major corporate winners created value by deploying capital abroad and building global franchises. The emerging opportunity is more focused on capital formation within Japan—and the companies positioned to finance, supply, and participate in that investment.
Rates: Higher and Healthier
In Japan’s case, rates are rising because prices are rising and economic growth is accelerating. The Bank of Japan may remain cautious, particularly after decades in which policymakers became accustomed to deflation and negative rates. But the longer end of the Japanese yield curve is increasingly responding to underlying demand for capital, stronger economic fundamentals and sustained domestic price increases rather than simply to changes in the policy rate. Japanese rates may have further to rise if the domestic investment cycle gains momentum.
A Multi-Year Roadmap
This is not a thesis about the next quarter or two; we believe it’s a roadmap for the coming several years.
Japan’s policymaking process can take time as consensus is built, but implementation can move relatively quickly once priorities are established. Policymakers have already identified numerous areas in which they want to encourage domestic investment.
If those initiatives are accompanied by stronger nominal growth and private-sector capital spending, Japan could enter a markedly different economic regime: one characterized by more investment at home, higher demand for capital and potentially stronger currency dynamics.
For equity investors, that would change the Japan opportunity as well. Rather than relying principally on the global success of Japanese companies investing overseas, the next chapter may increasingly be about the companies helping build Japan itself.
Olga Bitel, partner, is the chief investment strategist at William Blair.
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