What Japan and Europe’s institutional investors are thinking about Japanese equities now — A gentle explainer from professionals’ view for the second half of 2026

In one line, this analysis

The way professional investors overseas (especially in the UK and Europe) view Japanese stocks has shifted from a simple mindset of “undervalued because of a weak yen, buy for now” to a mature approach of selecting by identifying where Japanese companies are becoming an indispensable presence in the world.TOPIX emphasis, governance reform, and structural strengths are the three keywords.

① Japan and the UK accelerating the flow of money

In June 2026, a large-scale investment agreement between the UK and Japan was signed.A roughly 18 billion pounds investment deal sees Japan’s major companies (Mitsui Fudosan, Mitsui Fudosan, Nomura Real Estate, Mizuho, etc.) funding infrastructure, finance, and offshore wind in the UK, while the two countries collaborate in areas like clean energy, AI, semiconductors, and quantum computing. The UK regards Japan as its “most important partner,” and capital flows between the two countries are strengthening.

Point: A relationship where countries exchange money and technology is a long-term tailwind for their stock markets.

② Japanese stocks are shifting toward “TOPIX over Nikkei 225” as the mainstream

The Nikkei Average has crossed the milestone of 60,000, marking a strong rise in the past year, about 30% in pounds and more than double in three years (an “under-the-radar rally”). However, overseas professionals are scrutinizing the index’s components more tightly.

What matters here isthe difference between Nikkei 225 and TOPIX. The Nikkei 225 is more affected by a few high-priced stocks (AI, semiconductors, etc.), leading to skewed movements. By contrast,TOPIX is weighted by company size (market cap) andhonestly reflects the overall improvement in Japan Inc. and governance reforms. Therefore, abroad investors are shifting their focus to TOPIX for a fairer allocation (TOPIX's price-earnings ratio is around the high 17x; price-to-book around 1.7x).

Another change ismoving away from the simple equation “weak yen = export stocks up”. Niche top-tier companies that control the world’s supply chains are moving into a phase driven bystructural demand for AI and technology. In addition, the earlier discussion onGPIF’s domestic return to the home marketis attracting attention as a factor supporting Japanese stock buying.

③ Bank of Japan to raise rates midstream, but with some overreach risk

The Bank of Japan plans to raise the policy rate in June 2026 to1.0% and then, every six months by 0.25%, aiming for a final level of1.5% as part of normalization. Higher wages and more corporate capex are expected, and the view is positive on ending deflation and maintaining a “hot economy” (Run It Hot).

But there are concerns. If geopolitical risks in the Middle East push crude oil above $100 per barrel, there is a risk that inflation and a slowdown in the economy could occur simultaneously — a stagflation scenario. The 2026 growth rate (about 0.6%) could face tail risks (low probability but high impact).

④ Watch for the unwinding of the yen carry trade and FX (dollar/yen)

Dollar/yen sits around160–165 yen. With the US-Japan interest rate gap and the strength of the US economy, even if the BOJ raises rates, yen depreciation pressure is expected to continue. In the short term, there will be attempts to push toward 162–165 yen; mid-term (end of 2026 to 2027) could see a move toward150–158 yen due to additional rate hikes.

The key risk here isthe unwinding (unwinds) of the yen carry trade. Carry trades involve borrowing yen at low rates and investing in higher-yield overseas assets. If the BOJ’s additional hikes or the GPIF domestic shift trigger a rapid unwind, the ripple could reach global risk assets (especially US tech stocks),raising concerns about widespread market impact.

⑤ Japanese bonds re-emerging as a source of interest income

With higher rates,Japanese government bonds (JGBs) and corporate bonds (A credit or better)are becoming an attractiveincome sourcefor global investors. New funds for overseas investors (like Japan Government Bond Plus) are expanding.

Additionally, between 2025 and 2026,issuance of dollar- and euro-denominated bonds by Japanese companies is slated to reach about $100 billion. This move helps diversify funding abroad while domestic rates rise, and major UK/European pension and insurance funds are actively purchasing these.

⑥ Selective investment in “structural reform value stocks” such as petrochemicals

The Japanese petrochemical sector, moving away from excessive production of basic chemicals like ethylene to higher-value functional materials, is attracting attention. UK/European funds see “undervalued and reform-ready” companies as catalysts for value investing, identifying opportunities while weighing China’s supply glut and Middle East risks, and choose defensively to generate steady cash flow.

Two strategies actually used by overseas professionals

Money flows from the UK and Europe are distinctly polarized. “Market beta can be cheaply captured with a passive ETF (e.g., Amundi Prime Japan)”while,“excess returns (alpha) from leverage and event-driven bets” are concentrated on selective, active opportunities. To clarify terms, here are the focal funds—

1. Governance activist (the “resolute shareholder” who pushes for governance reform and returns) AVI Japan Opportunity Trust (AJOT) and NicheJungle Japanese Orphan Companies SDG Fund, among others.Companies that are undervalued and have accumulated cash, with low profile, get pressed for shareholder returns and governance improvements to unlock value.

2. Special situation / Event-driven (turning a special event into profit opportunity)Zennor Japan Fund, etc.Mergers/Acquisitions, parent-subsidiary restructurings, and other events trigger concentrated investments in beaten-down undervalued stocks.

3. Value - contrarian - engagement (buying undervalued stocks and engaging in dialogue to improve them)Man Japan CoreAlpha, SuMi Trust Japan Value Focus, Invesco Japanese Equity Advantage, Baillie Gifford Japan Trust, Lazard Japanese Strategic Equity, Thornbridge Nissay Japan Equity Contrarian Value, etc. These range from traditional strategies of buying undervalued stocks ignored by the market to selective bets on AI and high-quality growth companies; all emphasizethe company’s structural reforms and cash generation power.

Summary — from “buy because of yen depreciation” to “select for quality”

From the overseas perspective, the investment logic for Japanese stocks has completely moved away from a simple “weaker yen means buy cheap.” it now focuses on ① what critical points Japanese companies hold in the world’s AI and capital flows, ② which individual companies gain alpha through governance reforms — mature into assessing these aspects. Under the new environment of inflation and rising rates, TOPIX-centered high-quality selective investing is advancing, that is the conclusion.

Our takeaway for individual investors is simple.“Don’t buy just because prices are rising; instead, choose based on why a company is needed globally and how it’s improving”— borrowing the professionals’ perspective seems to be a key to navigating Japan’s stock market going forward.

Glossary mini-explanations

FDI: Foreign Direct Investment. When a company invests in factories or operations across borders.TOPIX / Nikkei 225: Both are representative Japanese stock indices. TOPIX is weighted by market capitalization (reflects overall), Nikkei 225 is price-weighted (heavily influenced by a few high-priced stocks).PER / PBR: Representative metrics for valuation. PER is price-earnings ratio; PBR is price-to-book value.Carry trade: A strategy of borrowing in a low-rate currency (yen) and investing in higher-yielding assets. The unwind can be a trigger for market shocks.Activist: The “conscious shareholder” who demands improvements in management and shareholder returns.Beta / Alpha: Beta indicates market-level price movements; alpha is the excess return above the market.

This article is a simplified reconstruction of market analysis. Please invest based on your own judgment and responsibility.
※This article summarizes market analysis from the perspective of UK and European investors, explaining terms in lay terms for beginners. Numerical figures and scenarios reflect the views at the time of analysis and may change. It does not constitute a recommendation to buy or sell any specific stock or fund.