Corporate earnings in Japan have been coming in strong this quarter, particularly in the technology hardware sector. Many companies are announcing large buybacks and big increases in dividends while others are being approached by private equity firms or considering mergers.

Yet the geopolitical backdrop has changed since the beginning of 2026: Sanae Takaichi was elected as prime minister of Japan while the war in the Middle East has significantly increased oil prices and is seeding inflation globally. As the same time, equity markets are reacting to the real and potential disruption of AI. Nicholas Weindling, portfolio manager of JPMorgan Japanese Investment Trust (JFJ), recently shared how he and the Tokyo-based investment team think about all of these factors when making investment decisions for the long term.

Impact of inflation, energy and defence

The first female prime minister of Japan has been well received internationally and remains popular domestically, in part by tackling cost-of-living issues. For example, although wages have been rising over the past couple of years, Japan imports many items, including food and commodities, which are now becoming more expensive; the yen is not a safe-haven currency and has weakened following the outbreak of the war, while the conflict itself is impacting supply chains.

Prime Minister Takaichi has a strong policy agenda focused on fiscal spending, AI, shipbuilding, semiconductors and defense. The current geopolitical environment, particularly the war in the Middle East, may play into this policy agenda. The war has sent energy prices soaring, which is critical for Japan, a large importer of energy. While the country imports most of its natural gas from Australia, most of its oil comes from the Middle East. The impact is not yet evident in corporate earnings but the energy shock is a potential risk to Japan’s economic growth, given its high cyclical exposure. We expect to see more emphasis on renewable energy, including a restart of nuclear plants, as the government seeks to increase the amount of nuclear power in the electricity mix to over 20%, more than double the current level.

In the meantime, JFJ has exposure to the energy sector via MODEC, an ultra-deep sea oil drilling company that has been one of the best-performing stocks in the past 12 months ending 30 April 2026. MODEC has a global duopoly with a European company that is covered by J.P. Morgan Asset Management’s European team, which helps the Japanese investment team gain critical insight to the global market and the company’s key customers.

Defence spending is also likely to increase, particularly under the new prime minister, who favors a strong military. Japan has been highly dependent on the US military but is in the process of a significant buildout of its own defence industry. In addition, a change in the law will allow Japan to begin to export defence technology. This focus on defence is changing the nature of Japan’s growth and the investment team is finding attractive stocks in industries JFJ had not previously invested in.

For example, IHI has a defence business and also makes aircraft engines, which offers high-quality recurring revenue from the maintenance business. JFJ also has a position in Mitsubishi E&S, an engineering and ship-building company. This industry historically has struggled in Japan but now has government support and offers strong recurring revenues. Both IHI and Mitsubishi E&S were among the top contributors to the portfolio’s performance over the past 12 months.

Limiting software exposure

While the geopolitical backdrop is a factor in some investment decisions, Weindling believes that impact of AI on companies over the long term cannot be overstated. The JFJ investment team is spending a lot of time looking for companies that will benefit from the significant investment in AI. JFJ added to its positions in Mitsubishi Electric and Sumitomo Electric, which are very involved in data centers and optical cables, respectively. JFJ also owns Adavantest, a company that tests chips and graphic processing units. The company has enormous market share with Nvidia and the JFJ investment team was able to confirm with the US research team that Advantest appears to be maintaining this strong position vs. its main US competitor.

However, the investment team has some concerns around Japanese companies with high exposure to software and JFJ has been refining its technology exposure. For example, the JFJ sold its position in NEC, a stock that has done well due to its defence business, and its holding in Hitachi, which has exposure to data centers and energy. In these cases, the portfolio team believes it can find companies with exposure to these businesses without taking on the current risks in the software industry.

Positioning in insurance and consumer companies

In addition to the new holdings across the technology and industrial sectors, the portfolio also added a position in Tokio Marine, a large insurance company. Japan’s domestic insurance business is an attractive three-player oligopoly, allowing companies strong pricing power. The investment team also notes that Berkshire Hathaway recently increased its already large stake in Tokio Marine.

In the consumer sector, Asics, the global leader in running and tennis shoes, has contributed significantly to the portfolio over the long term and continues to manage its business well, cutting underperforming stores and shoes. Watch-maker Seiko brought in specialists from global luxury watch brands to help turn around the Grand Seiko brand, which has been a tremendous success story. The new prime minister was recently photographed wearing this watch at an official event and the stock has been a top performer in the JFJ portfolio over the past 12 months.

Looking ahead

Strong performance of Japanese equities over the past year reflects two key factors: the normalisation of the Japanese economy with the return of inflation and interest rates above zero and the ongoing corporate governance revolution leading to a wave of corporate activity and more shareholder-friendly policies. While the geopolitical backdrop has changed, the JFJ investment team remains focused on building a roughly 50-stock, all-cap quality portfolio of Japanese equities with the potential to outperform the broader Japanese equity market over the long term.

The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.

The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.

Investment Objective:

The Company seeks capital growth from a portfolio of investments in Japanese companies. As the emphasis is on capital growth rather than income, shareholders should expect the dividend to vary from year to year. The Company has the ability to use gearing to increase potential returns to shareholders. The gearing policy is to operate within the range of 5% net cash to 20% geared, in normal market conditions

Risk Profile:

Exchange rate movements between the pricing currency of the underlying overseas investments held by the Company and sterling (the base currency of the Company) can cause the Company’s NAV (in sterling terms) to go up as well as down. For example, if sterling appreciates relative to Japanese yen, the value of the NAV in sterling terms will be negatively impacted; if sterling depreciates, the value of the NAV in sterling terms will be positively impacted. External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions. This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down. This Company may also invest in smaller companies which may increase its risk profile. The share price may trade at a discount to the Net Asset Value of the Company. The single market in which the Company primarily invests, in this case Japan, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies.

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