Prime Minister Takaichi’s clear reflation policy is making Japan attractive to investors once more, even though the policy rate, at 0.75 percent, stands at its highest level in thirty years. The panic surrounding the unwinding of the yen carry trade, which caused global turmoil two years ago, now appears to have definitively faded into the background.
At the end of last year, the Bank of Japan raised the policy rate from 0.5 to 0.75 percent. When the central bank unexpectedly increased rates from 0 to 0.25 percent in 2024, investors rushed for the exits, but this time is different. Since the BoJ’s decision, the leading Nikkei index has risen by approximately 13 percent.
“The risk in Japanese interest rates is no longer to the upside, but rather to the downside,” said Claire Huang, head of macro strategy research for North Asia at Amundi Asset Management. “Attractive valuations and increasing foreign demand could cause long-term rates to fall rather than rise.”
Whether domestic repatriation is already taking place remains unclear, according to Huang. She pointed out that Japan’s pension fund GPIF decided in 2025 to leave its strategic allocation for the period 2025–2030 unchanged: 25 percent Japanese bonds, 25 percent foreign bonds, 25 percent Japanese equities, and 25 percent foreign equities. GPIF made that decision despite rising interest rates and is not, for now, shifting on a large scale toward domestic bonds.
Clear policy
Among other investors, Japan’s image has shifted in recent months from that of a problem child with towering public debt and political fragmentation to that of a country with a clear policy compass. In particular, the crystal-clear reflation program of Sanae Takaichi, Japan’s first female prime minister, is providing guidance and confidence.
Takaichi was elected party leader and prime minister in October 2025, but it was the snap parliamentary election of February 8, 2026 that set the tone. Her political party, the Liberal Democratic Party (LDP), won 316 of the 465 seats, a “supermajority.” The party thus secured the largest number of votes ever in Japan’s Lower House. With this two-thirds majority, Takaichi can push through her agenda with virtually no parliamentary resistance, even beyond the Upper House, where the coalition lacks a majority.
“At the same time, investors now have a more concrete and detailed picture of her policy plans,” Huang said. Her policy agenda, dubbed “Sanaenomics” by analysts at Nomura and AllianceBernstein, represents a fundamental break with two decades of fiscal orthodoxy.
Takaichi is no longer steering on the annual budget deficit, but on government debt as a percentage of the economy. As long as the economy grows faster than the debt, that ratio will decline automatically. This does not mean Japan is abandoning discipline altogether. By international standards, the primary deficit is relatively limited at approximately 1 percent of GDP.
Primary deficit as a percentage of GDP, 2024
The goal of Prime Minister Takaichi is to stimulate economic growth, even if this temporarily leads to higher public debt. According to Huang, the plan is to gradually reduce that debt through inflation and targeted investment. With inflation around 3 percent and nominal growth of approximately 4.5 percent, the debt ratio can decline as long as the economy grows faster than the debt. “If debt declines relative to GDP, that happens almost automatically,” Huang said.
Current geopolitical tensions are also creating political room for additional government spending, particularly in defense. This makes a more active fiscal policy easier to justify. Ten years ago, the situation was different. Her major role model, Shinzo Abe, adhered more explicitly to fiscal discipline as advocated by international institutions, including the IMF.
“The situation is comparable to Germany, where more room has also emerged for government stimulus,” Huang said. “Fiscal risk is giving way to a fiscal renaissance.”
Seventeen critical sectors
The Japanese government will invest in seventeen “critical sectors.” In addition to defense, these include semiconductors, battery technology, hydrogen, artificial intelligence, and critical raw materials. The main opportunities lie in the small- and midcap segment, said Asia specialist Huang. Japanese companies hold large cash reserves that are not yet being used productively, she explained. Total cash and deposits of Japanese corporates represent 56 percent of GDP, which is much higher than in the eurozone at 24 percent and the US at 9 percent.
Corporate cash positions as a percentage of GDP
Because Japanese companies hoard significant cash, their return on equity (ROE), at approximately 9 percent, is substantially lower than in the United States. It is less than half the average in the S&P500 and also 2 to 3 percentage points lower than comparable European companies. At first glance, this may seem like a weakness, but it actually points to considerable improvement potential. When companies deploy their capital more efficiently, profitability can rise relatively quickly.
Small- and midcaps are particularly interesting, Huang argued, because many of these companies trade below book value. “Allocating to this segment does not have to be complex. Regional banks already provide a good reflection of the reflation story.”
Rotation out of the US
Many global investors remain underweight Japan, according to Huang. “Many portfolios allocate only 4 or 5 percent to Japan, even though the country accounts for approximately 6 percent of the benchmark. Sometimes Japan is missing from the allocation altogether.” In her view, Japan therefore represents an underestimated opportunity.
Huang expects Japan to benefit from the rotation out of the United States, the region that currently represents approximately three-quarters of the benchmark. The dollar index fell by nearly 10 percent in 2025. In addition, uncertainty surrounding Trump’s territorial statements about Greenland has not contributed to confidence in the US as a stable investment destination.