Japan's financial markets are attracting renewed global attention as equities post one of their strongest gains in decades.
In October 2025, the Nikkei 225 index recorded a monthly increase of 16.6%, its strongest increase in 35 years and reaching deep into record territory.
The surge coincides with the election of Sanae Takachi as Japan's first female prime minister, which has sparked commentary on Japan's markets and policy direction.
Foreign investors have responded decisively, as net purchases of Japanese cash equities reached about 5.4 trillion yen, about $35 billion, through 2025, according to the Tokyo Stock Exchange. During the year, equities in Japan remained one of the best performing major markets in both local currency and US dollar terms.
Leadership as a key economic factor
Ms Takachi took office in July 2025 after the Liberal Democratic Party lost its parliamentary majority. He later formed an alliance with the Japan Innovation Party after the break with Komeito in October. While the coalition did not win a clear majority, independent MPs supported them, voting 237 out of 465 in the prime ministerial election.
The administration outlined key policy priorities aimed at reducing inflation, strengthening energy security, and increasing defense spending. Policy measures under consideration include the removal of the provisional gasoline tax, subsidies for electricity and gas tariffs, adjustments to income tax cuts and a possible temporary consumption tax exemption on food and beverages for up to two years.
Japan also plans to restart nuclear power plants closed after 2011 and accelerate the development of next-generation reactors and fusion technology. Defense spending is expected to reach 2% of gross domestic product (GDP), moving ahead of the originally planned 2027 target.
According to JPMorgan, public support for the new government is strong, with approval ratings ranging between 70% and 80%, the highest in decades. Economists say this level of political stability supports the implementation of economic and market policies.
Ms. Takaichi's economic stimulus measures include a ¥17.7-trillion package as part of a broader ¥21.3-trillion plan, raising hopes the Bank of Japan could raise its growth outlook.
Market indicators and investor confidence
The Tankan Business Conditions Index for manufacturers rose to 15 in the last quarter of 2025, the highest reading since 2018. Small and medium manufacturers recorded the strongest gains, partly supported by lower US tariffs on Japanese goods, which were reduced from 25% to 15%.
Exports to the United States rose 8.8% from a year earlier in November after seven months of decline. Meanwhile, consumer confidence reached its highest level since April 2025.
Japan's labor market also remains favorable for both consumers and investors. Non-farm employment rose 0.9% in November from a year earlier, while the unemployment rate stood at 2.6% for four consecutive months amid rising labor force participation.
Nominal contractual income rose 2.2% in November, up from 1.9% in September. The largest labor union group, Rengo, wants a 5% wage increase in spring 2026 talks, in line with its request last year. In 2025, the average wage gain reaches 5.25%.
According to the Ministry of External Affairs, the government plans to train 2.3 million personnel to pursue digitalization between fiscal years 2022 and 2026. Highly skilled foreign professionals are encouraged through preferential residence programs including “J-Skip” and “J-Find”.
Focusing on innovation and business growth
Japan's infrastructure and capital markets remain major attractions for international companies. The Tokyo Stock Exchange remains the world's third largest exchange, while government incentives encourage research and development and patent filing.
Japan leads the Group of Seven (G7) in research and development spending, and hosts the largest number of researchers, creating a strong environment for innovation.
Over the next decade, more than ¥150 trillion of public-private investments are planned for the green transition, supported by the issuance of ¥20 trillion worth of GX Economy Transition Bonds.
The government also aims to expand the semiconductor sector and bioeconomy market to total sales of Rs 15 trillion and Rs 100 trillion respectively by 2030.
Startups and established firms benefit from advanced technology infrastructure, open innovation platforms and a highly skilled workforce in information technology and engineering disciplines.
Policies also support companies with foreign capital, including supportive regulatory conditions and financial services, enabling Japan to serve as a regional trade and financial center.
Economic partnership agreements and free trade agreements cover about 80% of Japan's trade, increasing access to international markets and increasing attractiveness for foreign investors. Inbound mergers and acquisitions have increased fivefold since 2014.
According to Grant Thornton, Japan's growth areas include information and communications technology, life sciences, energy, advanced manufacturing, and tourism. As a result, the Japan External Trade Organization (JETRO) reports that data centers, logistics, health care and real estate are attracting significant interest from foreign investors.
pace of foreign investment
According to JETRO's Invest Japan Report 2024, the inward foreign direct investment (FDI) stock reached 50.5 trillion yen at the end of 2023, up 9.3% from the previous year, equivalent to about 8.5% of gross domestic product.
Investments from the United States and Taiwan saw double-digit growth, driven by large semiconductor projects, including Taiwan Semiconductor Manufacturing Co.'s second plant in Kumamoto and Micron Technology, Inc. in Hiroshima. Technology up gradation by.
JETRO said the country ranks first in Asia in the Foreign Direct Investment Confidence Index and is among the top Group of 20 (G20) countries in terms of political stability and governance.
The government aims to increase the FDI stock to 100 trillion yen by 2030 through tax reforms, investment incentives and programs focused on innovation, advanced manufacturing and strategic sectors such as electric vehicles and semiconductors.
The Ministry of Foreign Affairs has expanded its global investment promotion network, established FDI task forces in major financial centers and hosted seminars to showcase Japan's business environment.
beyond market factors
According to Man Group, corporate governance reforms have strengthened Japan's appeal to investors. Companies have stepped up efforts to improve capital efficiency by selling non-core assets and reducing cross-shareholdings. Return on equity has also increased from about 8.4% to 9% over the last few years.
About 80% of companies listed on Japan's main exchange now submit capital improvement plans. A planned update of the corporate governance code in mid-2026 is expected to target excess cash holdings, which is often seen by investors as a drag on company value.
Furthermore, the country has the lowest crime rate among G7 countries. Japan also provides public health insurance coverage for residents and hosts 115 International Baccalaureate universities.
Tourists often note the country's cleanliness, and the World Economic Forum ranks Japan third globally and first in the Asia-Pacific region for travel and tourism development. — Mihikole A. moral