Stocks are soaring, so should you seize the chance to… Go big in Japan?

Sanae Takaichi, who took power last month as Japan’s first female prime minister, loves the music of heavy metal band Iron Maiden.

But Takaichi is even fonder of her nickname – ‘the Iron Lady’, coined for her admiration of the personality and policies of Margaret Thatcher.

Like her role model, the Japanese premier wants to shake things up: planning measures to promote growth; raise defence spending; and revive nuclear power.

It is a strategy that won praise from Donald Trump this week on the US President’s state visit to Japan, and it is also gaining her a fan base of international investors who are seeking to diversify away from the US.

The veteran US fund manager Warren Buffett is a long-standing Japan enthusiast. His Berkshire Hathaway fund has $24billion (£18.3billion) worth of stakes in the sogo shosha trading houses Itochu, Mitsui, Mitsubishi and Marubeni and Sumitomo.

Others are now following his lead. American private equity players have begun to snap up smaller Japanese companies at bargain prices.

The Nikkei 225 stock market this week leapt to a record 52,411 – which is 20 per cent above its level in September when this column alerted you to the buzz around Japan.

Takaichi’s arrival is adding to the excitement, producing double-digit increases this year in the shares of household names such as Panasonic, Sony and Toyota.

Other factors are the confident reports from companies including Fast Retailing, owner of the Uniqlo fashion chain. Despite tariffs, its US stores are trading ‘extremely successfully’.

Nicola Takada Wood, managing director of the AVI Japan Opportunity investment trust (where I am an investor), describes Takaichi’s election as a ‘cultural seismic shock’. She says: ‘It’s the culmination of structural reforms, improved governance and a quiet, but powerful, cultural shift in corporate Japan. Together, these forces have unlocked value across the market – and reframed Japanese shares for global investors.’

Does the Takaichi fan club sound like a source of potential profit to you? Here’s what you need to know before you join.

INDEX THAT KEEPS CLIMBING

Behind the 30 per cent rise in the Nikkei since January lies the stellar performance of stalwarts such as Kawasaki Heavy Industries. Its shares have soared by 70 per cent. The company’s products include motorcycles, one of which Takaichi used to ride.

Another reason for the index’s ascent is the trade deal with the US, as Darius McDermott of Chelsea Financial Services says: ‘Japan’s tariff rate is the lowest in Asia, and its regulatory environment remains stable.’

The Nikkei peaked at 38,916 in 1989, only returning to this point in 2024, with many false dawns in between. If you have prospered from the Nikkei’s bounce, you may be tempted to take profits. But McDermott argues that this is just the beginning.

Daniel Hurley, of investment management firm T. Rowe Price, also contends that the best may lie ahead: ‘Japan’s political shift brings a mix of continuity and fresh momentum.’

MARCH OF THE ROBOTS

Japan’s population is ageing – and shrinking. A nation of 124m welcomed just 686,061 babies in 2024. But the prospect of fewer workers in future is forcing companies to spend on innovation, at a pace that should improve productivity and profitability.

Japan boasts three of the world’s largest names in robotics – Epson, Fanuc and Kawasaki. McDermott highlights tech conglomerate SoftBank’s purchase this month of the robotics division of the Swiss engineering giant ABB.

SoftBank has vowed to be at the centre of the artificial intelligence (AI) boom, also taking stakes in two US corporations, the chip-maker Intel and

OpenAI, creator of the ChatGPT system. SoftBank’s shares are up by 195 per cent since January.

A BOARDROOM REVOLUTION

Nicholas Weindling, manager of the JP Morgan Japanese trust (an Interactive Investor best buy fund), highlights the new Japanese corporate mindset, with managers becoming less wary of radical change. This trust backs businesses such as Nintendo, Sony and insurer Tokio Marine.

The shift in boardroom attitudes has made Japan ‘a more transparent and shareholder-friendly market’, McDermott argues. Takada Wood says there has been a rise in ‘constructive activism’. Investors are working with managers to strengthen balance sheets and to return excess capital through dividends. However, small and medium-sized companies have been slower to adapt – which is why Takada believes these offer ‘the most compelling opportunities’.

In the UK, inflation is a fearful word. But Japan’s moderate rate of 2.9 per cent has been welcomed since it marks the end of the long epoch of persistent deflation during which consumers scrimped rather splashed the cash.

Inflation is also giving companies pricing power and encouraging workers to ask for pay rises, to which most companies are saying ‘yes’. Many are diverting that money into the stock market, which should provide a tailwind for share prices.

THE INTEREST RATE DILEMMA

Takaichi may be the investors’ heroine, but the Bank of Japan (BoJ) worries that her measures could weaken the yen – and send government bond yields soaring.

This would be bad news since the public debt already stands at more than 230 per cent of gross domestic product (GDP), the highest in the developed world.

The BoJ faces the challenge of normalising interest rates in the wake of the ending of the zero-rate epoch last year. It is under pressure to raise rates to stifle inflation which is becoming a concern for Japanese households.

HOW TO PLACE YOUR BETS

Companies such as Advantest and SoftBank are the beneficiaries of AI. But if you are already overweight in tech, Japanese financial stocks would get a lift if the BoJ orders a rate rise next month. The auto, real estate and telecoms sectors look interesting.

The Man Japan Core Alpha fund, an Interactive Investor and Hargreaves Lansdown best buy, gives exposure to a range of companies in these industries.

McDermott’s recommendations are the Baillie Gifford Japan trust and Comgest Growth Japan.

I ventured into Japan in 2023, intrigued by Buffett’s excursion into this market. A visit last year to the country gave me insights into the revolution running through the economy.

Now I am going to take a gamble on the benefits that could flow from Takaichi’s disruption.