Japan ends 30 years of deflation as corporate reforms trigger market rerating

For three decades, the Japanese economy remained trapped in a cycle of flat or falling prices, a phenomenon that stifled domestic growth and institutional investment. This era has officially ended. Inflation has now exceeded the Bank of Japan's 2% target for 45 consecutive months. Unlike previous short-lived spikes, this shift is underpinned by significant wage growth. The 2025 Shunto wage negotiations delivered a 5.3% increase, the second consecutive year above 5% and the highest level in over 30 years. This rising wage floor creates a virtuous cycle where increased consumer spending drives corporate earnings, allowing the central bank to finally abandon negative interest rates and yield curve control.

Corporate governance and the capital efficiency mandate

A critical catalyst for the current rally is the Tokyo Stock Exchange's aggressive push for capital efficiency. In 2023, the exchange began requiring listed companies to publish explicit plans to improve valuations, particularly those trading below book value. The response has been transformative: share buybacks reached a record 18 trillion yen in 2024. Furthermore, the number of activist investors in Japan has surged from 10 to 75 in a decade, forcing boards to unwind inefficient cross-shareholdings and prioritize shareholder returns. This internal restructuring suggests the market's recent gains are rooted in fundamental governance shifts rather than mere speculation.

Domestic liquidity and the NISA revolution

Japanese households, who historically held over 50% of their assets in cash, are beginning a massive reallocation. The government’s new NISA program, launched in early 2024, offers permanent tax-free status on investments. With 25 million accounts already active, Morgan Stanley compares this shift to the introduction of IRAs in the US during the 1970s. As trillions of yen migrate from stagnant bank deposits into equities, the domestic support for the stock market provides a cushion that was absent during previous cycles.

Navigating demographic hurdles and fiscal debt

Despite the optimism, Japan faces a severe demographic ceiling. The fertility rate hit a record low of 1.15 in 2024, and the working-age population is projected to shrink by 38% by 2050. Simultaneously, government debt stands at 235% of GDP. While overwhelmingly domestically held, rising interest rates increase the cost of servicing this debt, which is projected to reach 31 trillion yen in the next fiscal year. Investors must weigh the current corporate renaissance against these long-term structural pressures.