One recent major change in Japan’s economic landscape was the Bank of Japan raising the policy interest rate to 0.75%, the highest level in 30 years. A combination of unconventional monetary policy measures, pandemic-induced inflation and labor force tightening due to ageing finally put upward pressure on wages and pushed Japan out of the deflationary mindset. While there was a risk of tariffs derailing progress, the downside turned out to be less than predicted. Expectations that Japan’s economy would grow somewhat faster than the potential growth rate eventually persuaded the Bank of Japan to raise rates.

Brokers today are overwhelmingly bullish on the stock market. Japan combines great fundamentals, including sustainable inflation replacing 30 years of stagnation and the decentering of the United States, with great positioning. Japanese markets have been seriously outperforming global peers in recent months and attracting increasing inflows from international investors. People used to associate holding Japanese stocks with pain. Now, however, not holding them is far more painful!

In fact, the whole atmosphere of equity investing has changed. Japanese corporates are now more open to dialogue with activist or engagement investors, while the behavior of Japanese long-only investors has also changed as a result of the stewardship code. The new corporate governance code and the stewardship code work in tandem, making good chemistry for the sound development of capital markets.

Many analysts feel that something profound is going on — something which goes well beyond a tactical asset allocation call. Why has Japan suddenly decided to become more productive? Some point to the population crisis as the answer. GDP is the labor force times productivity, so if the labor force is shrinking, simple math dictates that boosting productivity is the only viable solution. Societal need is driving deep reforms, which are in turn driving a more productive economy and market.

But what about geopolitical risks? The case can even be made that the new blending of foreign and economic policy is a return to the historical norm, while the globalization and relative harmony of the last 50 years were an aberration, albeit a positive one. Straddling the United States and China, Japan is working to balance its strategic partnership with Washington while managing its deep economic ties with Beijing.

American exceptionalism is being questioned, global supply chains are fragmenting and a breakthrough technology with transformational implications is just around the corner. Against this interesting backdrop, a new Japan steps up — one that is inflationary, has a revitalized corporate sector with technological leadership in certain areas and is led by its first-ever female prime minister. Meanwhile, as the yen tests new lows, the Nikkei and TOPIX are touching record highs. What signals are financial markets sending out?

Tomochika Kitaoka was excited about the positive synergies between corporate governance reform and the labor shortage. As he sees it, the labor shortage is a good opportunity for Japan’s corporate sector to overhaul its business model by cutting costs, raising prices and improving productivity through AI functionality.

On the corporate governance side, Kitaoka was positive about the number of companies that have hired independent external directors and embraced the Western-style corporate governance format. At the same time, around 11% of the total assets for non-financial corporations are still in cash and deposits, roughly twice the ratio in the United States or Europe, which suggests that the deflationary mindset lingers.

Abhijit Chakrabortti countered that independent directors do not necessarily have much actual control. He hopes to see more Japanese companies run by foreigners. While shareholder value is increasing, and buybacks and dividend payouts have gone up, for Chakrabortti the really big forward step will be when Japanese management abandons its home bias and becomes a pure meritocracy like the U.S. tech sector.

The next discussion topic was the multi-year thematic investment opportunity represented by AI and AI infrastructure. “AI and semiconductors” is topmost of the 17 designated strategic fields in the new government’s growth strategy. Japan, Chakrabortti pointed out, has carved out a successful niche in AI infrastructure through its semiconductor capital equipment companies, while one of the only three firms worldwide that make the turbines required to provide power to electricity-hungry data centers is Japanese. Kitaoka noted that the government was doing a good job supporting both Japanese and non-Japanese semiconductor companies in Japan, with numerous beneficial spillover effects.

When, though, will the Japanese start buying in their own equity market? While moderator Govinda Finn felt that was already happening, with 1 in 4 people in Japan over-18s having a NISA account, Chakrabortti suggested that, for all the talk about NISA accounts, most Japanese investors only used them to buy on the NASDAQ and NYSE. “When are we going to see 1989 again?” he asked.

This panel took a deep dive into the world of companies and startups operating between Japan and the Middle East. Panelists pointed out that the upcoming state visit of the UAE president to Japan will underline the two nations’ partnership and show that the relationship has expanded beyond energy to encompass a greater diversity of businesses. As Yoshihiko Katsuda noted, Middle Eastern sovereign wealth funds have recently invested in video gaming and are interested in real estate and LBOs associated with corporate restructuring in Japan. Meanwhile, Japanese manufacturers are making efforts to expanding into the data center eco-system, while startups are also increasing their presence in such areas.

CHITOSE Group is one such startup. A Japanese biotech company that operates a microalgae production facility in Malaysia, CHITOSE Group is looking to expand into the Middle East. Why? Because the region’s expansive deserts and abundant sunlight make it the perfect place for cultivating microalgae that can be turned into products including sustainable jet fuel, plastic, paint and food. “We only have four or five decades of oil left. We simply have to use photosynthesis to make everything,” noted Tomohiro Fujita. Despite being a major fossil fuel exporter, the UAE is mindful of global warming. Rising opportunities in green technology, from carbon capture to ammonia and hydrogen, represent a lucrative business opportunity.

Japan is rich in opportunities for Middle Eastern companies. M&A is thriving as listed Japanese firms shed non-core businesses to raise their PBR and smaller companies seek to solve the succession problem through buyouts. The Japanese real estate market is also booming with particularly strong demand for luxury retail locations, multi-purpose residentials and new-build offices with state-of-the-art IT.

Contrary to outdated stereotypes, Japan is open to FDI. Indeed, FDI has risen consistently despite setbacks like the Global Financial Crisis, the Great East Japan Earthquake and the pandemic, said Takeo Nakajima. Japan wants FDI because it spurs innovation, strengthens supply chain resilience and reinvigorates regional economies; foreign investors are drawn in by the opportunity to engage with Japanese companies and consumers. Incentives, subsidies and deregulation have driven a spike in investment in the semiconductor field, while foreign accelerators, incubators and investors are increasingly interested in Japanese startups. A new circular model is evolving whereby Japanese ventures funded by foreign money become globally competitive businesses as they expand into foreign markets. “There’s a whole ecosystem. When Middle Eastern investors come to Japan, you are not alone,” said moderator Mitsuru Obe, bringing the session to an end.