For decades, Japanese stocks were the investment world's cautionary tale—a reminder of what happens when a bubble bursts and never reflates. The Nikkei 225's December 1989 peak of 38,915 became a psychological ceiling that seemed permanently unbreakable.

Then came 2025.

Japan's stock market delivered a stunning 24% return in local currency terms, outpacing every other major market globally. The UK came in second at roughly 20%, while the U.S.—despite all the AI hype—managed a comparatively modest 14%, according to data compiled by Visual Capitalist through December 17, 2025.

What Changed in Japan

Japan's outperformance isn't accidental. It reflects a confluence of structural reforms and macroeconomic tailwinds that finally aligned after years of false starts.

Corporate Governance Revolution

The most significant driver has been a quiet revolution in how Japanese companies treat shareholders. For years, Japanese corporations hoarded cash, maintained Byzantine cross-shareholdings, and prioritized stakeholders over owners. That's changing.

The Tokyo Stock Exchange has been pressuring companies trading below book value to improve capital efficiency or face potential delisting. The result: buybacks, dividend increases, and asset sales that have unlocked billions in shareholder value.

"Japan is finally doing what America did in the 1980s—forcing management to focus on shareholder returns. The transformation is real, and it's only getting started."

— Charles Schwab 2026 International Outlook

The Yen Factor

Currency dynamics have also helped. The yen has weakened substantially against the dollar over the past three years, making Japanese exporters—automakers, electronics companies, machinery manufacturers—dramatically more competitive globally.

For international investors, the currency effect cuts both ways. Japanese stocks have soared in yen terms, but dollar-based returns have been more muted due to currency translation. Still, many global investors have been buying unhedged Japan exposure, betting that corporate profits will eventually offset any yen drag.

Political Stability

Japanese stocks hit a record high on October 6, 2025, after Sanae Takaichi was elected leader of the ruling Liberal Democratic Party. Investors cheered expectations of continued government spending and stable monetary policy under her leadership.

In contrast to the political volatility in the U.S. and parts of Europe, Japan has offered relative predictability—a quality that attracts risk-averse global capital.

How Japan Compares to Other Markets

Japan's outperformance extends beyond just 2025. According to Hurun's Global 1000 ranking of the world's most valuable companies, Japan placed third globally with 63 companies in the top 1,000—behind only the United States (410) and China (158).

India, Germany, and the UK tied for fourth with 40 companies each, highlighting how the balance of global economic power continues shifting toward Asia.

Within the Asia ex-Japan region, performance has diverged sharply:

  • India's NSE: 16% annualized returns over five years
  • China's Shanghai: Just 2.8% annualized over the same period

The contrast underscores why global investors have been reallocating from China to Japan and India throughout 2025.

What Could Go Wrong

Despite the bullish backdrop, risks remain:

  • Yen strength: If the Bank of Japan continues normalizing policy and the yen strengthens, export-driven Japanese companies could face headwinds. Historically, there's been a negative correlation between yen strength and Japanese stocks.
  • Valuation expansion: After a 24% run, some Japanese stocks are no longer as cheap as they were. Further gains will require earnings growth, not just multiple expansion.
  • Global recession: Japan's export-heavy economy would suffer if global demand weakens significantly.

How to Invest

For U.S. investors interested in Japanese exposure, several options exist:

  • ETFs: The iShares MSCI Japan ETF (EWJ) and WisdomTree Japan Hedged Equity Fund (DXJ) offer different currency exposures
  • ADRs: Major Japanese companies like Toyota, Sony, and Honda trade on U.S. exchanges
  • Mutual funds: Several actively managed Japan funds have delivered strong results, though fees are typically higher

The Bottom Line

Japan's stock market renaissance isn't a fluke. Structural reforms, favorable currency dynamics, and political stability have combined to create one of the most compelling investment opportunities in developed markets.

Whether the outperformance continues in 2026 will depend largely on corporate governance momentum and the yen's trajectory. But for investors who've ignored Japan for decades, 2025 provided a stark reminder: sometimes the best opportunities hide in plain sight.