The Japanese stock market has shown strong performance in 2026, outperforming the broader global market as measured by the MSCI World index. This growth was driven by two main themes: the rise of artificial intelligence (AI) and the Bank of Japan's gradual increase in interest rates. Technology and financial sectors, particularly banks and semiconductors, contributed significantly to this growth, accounting for nearly two-thirds of the market's gains despite representing just over a third of the market.
From a style perspective, value investments outperformed growth, continuing a trend that has dominated for several years. Smaller companies also performed well but lagged slightly behind larger, more established firms. The average fund in the IA Japan sector returned 27.3% over the past year, slightly behind the MSCI Japan index, reflecting the challenges faced by fund managers who did not heavily invest in the best-performing sectors.
Two actively managed funds on the Wealth Shortlist demonstrated different outcomes. Man Japan CoreAlpha returned 35.4%, benefiting from its value investment style and focus on financials. In contrast, Baillie Gifford Japanese returned 19.4%, hindered by its focus on growth-oriented companies and lower exposure to financials. Despite these differences, both funds are expected to outperform the market over the long term due to their complementary investment styles.
Looking ahead, Japanese companies remain cheaper than those in other developed markets, offering potential value for investors. The country is also undergoing economic transitions, including corporate governance reforms aimed at making it more attractive to investors. Rising bond yields in Japan present both opportunities and challenges, affecting borrowing costs for companies and influencing the yen's strength, which could impact exporters and importers alike.