Capitalizing On Japan’s Recovery: Navigating FX Risks In Equity Japan

Executive Summary

Japan’s economy is steadily emerging from decades of deflationary stagnation. Driven by a virtuous cycle of wage growth and consumer spending—alongside deepening corporate governance reforms—the Japanese market is currently experiencing its most attractive investment window in nearly three decades. Year-to-date (YTD), Japan Nikkei 225 index have advanced nearly 30%, with cumulative three-year gains approaching 100%. However, on the eve of the Bank of Japan’s (BOJ) mid-September monetary policy meeting, the Japanese Yen (JPY) has exhibited heightened volatility. For investors looking to allocate to Japanese equity funds, significant investment opportunities are paired with undeniable macroeconomic and foreign exchange risks.

 Structural Transformation and Economic Momentum

For the past 30 years, Japan has been constrained by deflation, tepid growth, and an ultra-low interest rate regime. Today, structural transformations are underway across its macroeconomy and capital markets, supported by reflation, accelerating wage gains, the BOJ’s orderly exit from ultra-loose monetary policy, and corporate governance enhancements. Large enterprises delivered historic wage hikes during recent Shunto negotiations, reaching multi-decade highs. This has bolstered household real income and consumption capacity, shifting Japan’s growth paradigm from being purely export-dependent to increasingly driven by domestic demand and services consumption.

Sector Highlights and Key Industry Drivers

• Semiconductors & Advanced Technology:

Japanese semiconductor equipment and materials suppliers have captured intense global capital flows amid surging demand for artificial intelligence (AI) and advanced manufacturing processes.

Tokyo Electron (TEL), the world’s third-largest semiconductor equipment supplier, and Advantest, the leading global IC testing equipment manufacturer, have both surged over 150% over the past year. DISCO, a market leader in semiconductor precision dicing equipment, has posted gains exceeding 45%.Together, these three titans boast a combined market capitalization exceeding JPY 55 trillion, forming core holdings across major Japanese semiconductor ETFs and active tech funds.

Kioxia has emerged as a standout performer, riding exponential demand across AI servers, High Bandwidth Memory (HBM), and NAND Flash. Bolstered by expanding fundamentals and market re-rating, its share price has appreciated nearly 19-fold over the past year, significantly outstripping its domestic tech peers.

• Trading Houses (Sogo Shosha):

Benefiting from global resource demand and diversified portfolio structures, Japan’s iconic top five trading houses—Mitsubishi Corporation, Mitsui & Co., ITOCHU, Sumitomo Corporation, and Marubeni—have seen share prices appreciate between 30% and 45% over the past year.

• Financials (Megabanks):

As monetary policy normalizes, Japan’s banking sector stands to benefit directly from net interest margin (NIM) expansion and improved profitability. The three major “Megabanks”—Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG), and Mizuho Financial Group—have all recorded share price gains of over 60% over the trailing 12-month period.

• Inbound Tourism, Retail, and High-End Industrials:

Tourism, retail, and transportation sectors continue to capture tailwinds from the post-pandemic recovery in international visitor arrivals and rebounding domestic consumer activity. Over a longer horizon, Japan retains deep technological moats and global leadership in robotics, factory automation, advanced manufacturing, and precision engineering—providing high barriers to entry and durable long-term investment value.

The JPY Conundrum, Cross-Border Spillovers, and US Treasuries

Despite strong corporate earnings and macroeconomic improvements, the yen’s sharp depreciation has become a central focal point globally. The persistent weakening of the yen—at one point sliding to a four-decade low near 164 JPY/USD—not only squeezed domestic households via imported inflation but also exerted spillover effects on the US Treasury market, driving Treasury yields steadily higher.

As one of the largest foreign holders of US Treasuries, Japan faces potential liquidity pressure to liquidate overseas assets when managing disorderly JPY depreciation and funding currency market interventions. Forced, large-scale divestments of US Treasuries risk destabilizing liquidity in the US debt market, compelling yields to move higher to clear additional supply and attract capital, which in turn raises financing costs across the US and global real economies.

Reports indicated that US Treasury Secretary Bessent voiced concerns during his visit to Japan in May regarding Prime Minister Sanae Takaichi’s economic policies, questioning the policy mix of aggressive fiscal expansion combined with ultra-low interest rates, which compounded downward pressure on the yen. While a depreciated yen escalates Japan’s domestic import costs for energy, food, and raw materials, it also grants Japanese exporters an aggressive pricing advantage in global markets, indirectly dampening the competitiveness of US exporters.

Central Bank Coordination, Interventions, and Rate Outlook

In late July, Japanese and US authorities conducted a rare joint market intervention to purchase yen—the first coordinated FX intervention between the two nations since 1998—triggering a swift ~5% rebound in the currency from its 40-year nadir of roughly 164 JPY/USD.

According to data from Japan’s Ministry of Finance (MOF), authorities deployed a record $96.4 billion to support the currency over the month spanning July 30 to August 26. Foreign reserve disclosures for late August showed an $87.8 billion month-on-month decrease in foreign securities holdings—closely matching the intervention scale and intensifying market speculation that Japan funded its record FX operations via US Treasury liquidations.

During the G20 meetings, Treasury Secretary Bessent met with BOJ Governor Kazuo Ueda to discuss the imperative of anchoring inflation expectations and curbing excessive exchange rate volatility. Expressing explicit support for Japan’s market and financial measures to stem yen weakness, Bessent’s posture was widely interpreted by markets as implicit pressure on the BOJ to accelerate rate hikes.

With the US–Japan yield differential viewed as the primary driver of yen weakness, market attention is squarely focused on the BOJ’s Monetary Policy Meeting on September 17–18. Mounting rate hike expectations, coupled with aggressive short-covering, have catalyzed a sharp rally in the yen past the 153 JPY/USD threshold, setting a seven-month high.

Investment Outlook and Equity Japan Performance

Japan remains an essential destination for portfolio diversification and capturing long-term growth across mature Asian markets. However, retail and institutional allocations via Nikkei 225 or TOPIX-benchmarked index funds are heavily concentrated in automotive, electronics, semiconductor equipment, and mega-cap financials. Consequently, slowdowns in global demand, trade frictions, or semiconductor downcycles can directly weigh on broad index performance. Investors must also track geopolitical tensions, US–China tech competition, shifts in trade policies, and commodity price volatility, all of which directly affect Japanese corporate guidance.

Crucially, foreign exchange risk cannot be overlooked. According to Lipper data, as of September 3Crucially, foreign exchange risk cannot be overlooked. According to Lipper data, as of September 3, 2026, the 34 Japan equity funds and ETFs registered for domestic sale generated an average TWD-denominated return of 21.6% YTD, 31.9% over the past year, and 69.7% over three years. Realized investor returns depend not only on underlying share price appreciation but also on JPY/TWD exchange rate fluctuations. If the Japanese yen continues to depreciate against the New Taiwan Dollar during an equity rally, the FX drag can significantly erode or completely offset local-currency investment returns. FX hedging strategies should therefore remain a primary consideration.

Figure 1: Performance of Equity Japan RFS Taiwan

Source：LSEG Lipper, as of 2026/9/3, in TWD