By AKEMI KONDO DALVI, CPA/PFS, CFP
Some have likened Japan’s economy to a sleeping giant that is finally waking up.
Since 1998, Japan’s economy has been stuck in deflation – prices stagnated, companies hoarded cash, and the stock market disappointed investors. This was triggered by the 1991 financial crash, which plummeted the value of real estate and stocks.
The result was what economist Richard Koo coined a “balance sheet recession,” where Japanese firms focused on paying down debt instead of investing. Individuals who held large amounts of debt and suffered from dropping wages also focused on reducing debt rather than consuming goods or investing in the stock market.
Economists feel that their deflationary era is ending, and Japan could offer long-term opportunities for growth. After three decades of near-zero inflation, prices have risen above the Bank of Japan’s 2% target for three years. Inflation often has a negative connotation, but for Japan, this signals that the economy is moving again.
Likewise, interest rates and wages are rising as well. Japan’s economic growth also grew at an annualized rate of 2.1% in Q1 2026, driven by stronger consumer spending and exports. However, Bank of Japan recently paired back the full-year growth forecast to just 0.5% due to the high crude oil prices because of the U.S.-Iran war.
During Japan’s Lost Decade, corporations sat on large sums of cash but did little with it to reward investors. In 2022, the Tokyo Stock Exchange (TSE) demanded companies trading below book value to articulate a credible path to improve or risk being delisted. So far, this has resulted in direct benefits to shareholders in the form of record share buybacks and dividends flowing back to investors.
Analysts suggest that the return on equity (ROE) improvements remain unfinished. Corporations sitting on large, underutilized assets might be encouraged to do more than just governance reform and possibly use the capital to create meaningful investment opportunities for equity stockholders.
Investors may also want to pay attention to Japan’s industrial companies, which could be the quiet beneficiaries of AI and defense spending. While most of the investing market focuses on the AI model developers (OpenAI, Anthropic, Gemini), Japan’s industrial economy provides components and equipment behind data centers, benefiting on both the upstream and downstream side of the AI capex cycle.
Think of this like the example of supplying picks and shovels to 49ers; whether the miner finds gold or not, you win. With AI enthusiasm and rising government defense budgets, Japan offers entry into growing market sectors at more reasonable valuations.
While Japan’s landscape is interesting, it is a venture for long-term investors. Even optimistic forecasters see Japan growing at less than 1% in 2026. In the short-term, Japan’s stock market could be volatile due to the fact that 93% of Japan’s oil supplies come from the Middle East, which has been severely disrupted by the fighting over the Strait of Hormuz.
Japan has historically been a leader in clean energy, such as hydropower, but it currently accounts for less than 9% of Japan’s electricity generation. Additionally, the energy emergency has fundamentally altered Japan’s long-term strategy. Under a newly revised strategic energy plan, Tokyo is aggressively shifting to maximize nuclear power, restarting roughly half of its 33 operable reactors to displace fossil fuel imports.
Another long-range difficulty is the country’s aging population. Japan has high public debt, and rising debt-servicing costs. Like the U.S., the Japanese government is struggling to find a sustainable budgetary path forward to care for public needs and fulfill promised benefits. Japan’s birth rates have fallen, while their elderly population continues to grow. This coupled with strict immigration policies has only intensified the accumulation of their government debt, which currently stands at 250% of its Gross Domestic Product (GDP).
While Japan is not a “get rich quick” trade, Japan does offer an interesting investment opportunity. Japan’s corporate reforms, the consumer savings rotation, the AI tailwinds play, and energy transition may provide long-term returns for international investors looking to include Japan in their diversification investment strategy.
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The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783, info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice. Opinions expressed are not necessarily those of The Rafu Shimpo.