Japanese Equities Offer Potential Opportunities for Alpha Enhanced Investing
Investors are waking up to Japan’s $7.9 trillion stock market.1 In 2025, performance was the story. The MSCI Japan Investable Market Index, for example, gained nearly 26% last year,2 outpacing the S&P 500 and the Stoxx Europe 600.3 This growth has fueled increased interest from global investors; inflows into Japan equities from US investors are at their highest level in three years.4
At Goldman Sachs Asset Management, we work with clients around the world who are invested in Japanese equities or considering an allocation. Here are five questions we think investors should consider as they look ahead to 2026.
1. What is the near-term outlook for the Japanese economy?
Japan’s economy is in transition. Following decades of deflation, consumer price growth is expected to exceed the Bank of Japan’s 2% target in 2025.5 Interest rates, long held at or below zero by the central bank, are gradually rising.6 After contracting in 2024, the economy is expanding again, albeit at a modest pace.7
In this evolving environment, we see encouraging signs. Real disposable income is expected to increase moderately in the year ahead, driven in part by faster wage growth that should potentially support a steady recovery in consumption.8 The outlook for Japan has been lifted by the government’s July agreement with the US that set a 15% tariff on most Japanese imports entering the US market.9 That includes automobiles, which previously faced a 27.5% tariff.10 Another potential source of limited support is the ¥21.3 trillion ($135 billion) economic stimulus package which Japan’s new prime minister, Sanae Takaichi, announced in November.11 This outlook for Japan is buoyed by steady growth prospects at the global level,12 an important factor given 40% of Japanese companies’ sales are generated overseas.13
2. Will the macro and fiscal environment support Japanese equities in the year ahead?
We believe Japanese equities will be boosted by positive tailwinds going into 2026, including moderating inflation, stable monetary policy and government fiscal support. Wage growth will support robust corporate capital expenditure and consumer spending, which will drive earnings, in our view. We see corporate governance reforms continuing to unlock shareholder value through increased dividends and share buybacks. Total buybacks are on track to reach about ¥18 trillion in 2025, more than two times the amount seen before the pandemic.14
Japanese corporate earnings per share (EPS) grew by about 2% per year from 2008 to 2019.15 Since then, the pace of annual EPS growth has accelerated to 8% thanks to stronger nominal growth.16 We expect EPS to grow by 8% to 9% in 2026.17
3. What should international investors keep in mind when considering Japanese equities?
Beyond the large, established companies that make up Japan’s prime equity market, including globally famous names such as Toyota, Sony and Nintendo, Japanese companies can be hard for international investors to assess for two main reasons. First, analyst coverage of Japanese companies is sparse compared with Europe and the US. For example, the MSCI Japan Index has a market-cap weighted average of 18 analysts per company, compared with 45 in the S&P 500.18
The second point concerns the dominance of the Japanese language in the equity market. While 94% of large-cap companies report earnings in English, the overall figure for Japanese equities is just 54% because English-language disclosure is far less common among mid- and small-cap companies.19 This leaves nearly half of Japan’s equity market far less accessible to non-Japanese investors.
4. How can an Alpha Enhanced approach help investors overcome these informational challenges?
The Alpha Enhanced approach to equity investing aims to strengthen passive portfolios while maintaining beta exposure. It incorporates an alpha-seeking component that is controlled and risk-managed, allowing investors to use their portfolio risk budget more efficiently. The versatility of the Alpha Enhanced approach allows investors to seek outperformance, diversify risk and optimize fee budgets effectively in line with their objectives.
Complex and less transparent markets may create structural advantages for an Alpha Enhanced approach to equity investing built around a systematic, data-driven stock-selection process. With a quant engine at their core, Alpha Enhanced strategies may have an edge in gathering and processing alternative data sources that can potentially play an important role in assessing risk and identifying opportunities in Japanese equities. For example, Japan grants more patents than most developed countries, yet the vast majority of patent applications are in the Japanese language.20 This rich data source with limited access can potentially expand the available alpha opportunity set for quant investors.
5. What potential benefits does the active ETF vehicle offer to investors in Japanese equity markets?
Actively managed exchange-traded funds combine the benefits of active management, such as alpha potential and risk management, with the transparency, cost-effectiveness and ease of trading that come with the ETF vehicle. The versatile solutions offered by active ETFs may help investors capture potential opportunities in less efficient markets where information may be harder to access. Active ETFs that offer an Alpha Enhanced approach to Japanese equities may allow investors to seek alpha in a risk-controlled manner and benefit from the informational edge afforded by systematic stock selection.
1 Japan Exchange Group. Total market capitalization data as of January 6, 2026. The original figure of ¥1,234 trillion has been converted to US dollars at the exchange rate as of January 6, 2026.
2 “MSCI Japan IMI (JPY) Index Factsheet,” MSCI. As of December 31, 2025.
3 The S&P 500 had a total return of 17.9% in 2025. Source: S&P 500 Factsheet. S&P Dow Jones Indices. As of December 31, 2025. The Stoxx Europe 600 posted a 16.7% gain in 2025. Source: Refinitiv data as of December 31, 2025.
4 “Goldman Sees US Investors Flocking to Japan as Nikkei Surges,” Bloomberg News. As of November 9, 2025. Bloomberg cites Bruce Kirk, chief Japan equity strategist in Goldman Sachs Global Investment Research.
5 Goldman Sachs Global Investment Research. As of December 10, 2025.
6 Goldman Sachs Global Investment Research. As of December 9, 2025. Goldman Sachs analysts expect the Bank of Japan to raise its policy rate gradually to 1.5% in the second half of 2027 and to maintain it at this level through 2028.
7 Goldman Sachs Global Investment Research. As of December 9, 2025. Goldman Sachs analysts see Japanese gross domestic product increasing by 1.2% in 2025, 0.7% in 2026, 1.2% in 2027, and 1.1% in 2028.
8 Goldman Sachs Global Investment Research. As of November 26, 2025.
9 “Implementing the United States-Japan Agreement,” The White House. As of September 4, 2025.
10 “Exclusive: Trump signs order to bring lower Japanese auto tariffs into effect,” Reuters. As of September 5, 2025.
11 “Japan's cabinet approves lavish stimulus as markets fret over Takaichi's fiscal policy,” Reuters. As of November 21, 2025.
12 Goldman Sachs Global Investment Research. As of December 9, 2025. Goldman Sachs analysts see the global economy expanding by 2.8% annually from 2025 through 2027 and 2.7% in 2028.
13 QUICK, FactSet and Goldman Sachs Global Investment Research. As of November 2, 2025.
14 Nikkei Value Search, Goldman Sachs Global Investment Research. As of December 4, 2025.
15 MSCI, Bloomberg. As of December 11, 2025. The period analyzed runs from the start of 2008 to the end of 2019.
16 MSCI, Bloomberg. As of December 11, 2025.
17 Goldman Sachs Asset Management, Goldman Sachs Global Investment Research. As of December 11, 2025.
18 Goldman Sachs Asset Management, MSCI, TOPIX, Bloomberg. Using index constituents' data as of September 30, 2025, and analyst coverage data as of October 29, 2025.
19 “Summary Report of the English Disclosure Implementation Status Survey,” Japan Exchange Group. Data as of December 31, 2024.
20 Goldman Sachs Asset Management. LHS: World Population Review. Dataset does not include patents submitted via intragovernmental collectives, such as the Eurasian Patent Organization or the African Intellectual Property Organization, as those patents are not traced back to a single country by the World Intellectual Property Organization. Countries with most Patent grants are only shown. Germany has the highest number of patent grants within Europe. RHS: IPStart. During 2023, a total of 300,133 Patent applications were filed in Japan. Countries that filed patent applications in Japan include Japan, US, China, Korea, Germany and more. Data as of end-2023.
