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Japan’s stocks are expected to extend gains in 2026, with Prime Minister Sanae Takaichi’s aggressive fiscal plans building on the momentum of the past year.Tokyo’s benchmark Topix index has weathered tariff shocks, two Bank of Japan (BoJ) rate hikes and a change of prime minister to gain about 23% this year, putting it on track for its biggest outperformance versus the S&P 500 since 2022. The rally — which led Japan’s benchmarks to multiple record highs — has laid the foundations for further gains, strategists say.Construction, infrastructure and energy shares are set to shine next year as Takaichi’s government pledges trillions of yen in domestic funding. Robot makers may win out, too, as tech focus shifts toward physical AI. Banks, among this year’s top performers thanks to higher interest rates, are also expected to extend their rally.Here are themes expected to drive Japanese stocks in 2026:Takaichi tailwinds2026 stocks to watch: Construction, infrastructure, energy, consumer2025 winner: Toyo Engineering Corp, the nuclear plant constructor, has gained over 261% year-to-dateJapan’s first female prime minister unveiled around ¥18tn ($115bn) in extra stimulus funding in November, fuelling investor optimism. Her plan focuses on spending to bolster 17 “strategic industries,” including quantum computing and nuclear fusion.The impact from Takaichi’s growth strategy “has got to be net positive for the economy, especially for the equity market,” said Naoya Oshikubo, chief market economist at Mitsubishi UFJ Trust & Banking Corp. “Semiconductors, infrastructure, construction companies will all see tailwinds.”Takaichi’s utility subsidies and cash handouts should also boost retail stocks by giving consumers more disposable income, said Chris Smith, a portfolio manager at Polar Capital LLP.But Takaichi brings downside risks too, Smith warned. “She needs to be careful, because her aggressive fiscal policy has been a source of pressure on the yen and bond rates,” he said. Japan’s ongoing diplomatic spat with China, which was triggered by Takaichi’s comments on Taiwan, could also weigh on equities if it escalates, Smith added.Corporate reform2026 stocks to watch: Cash-rich firms2025 winner: Auto-care product maker Soft99 Corp, which gained 172%. Activist fund Effissimo Capital Management launched a bid to rival management’s buyout offer in September, and ultimately succeeded.Japan’s corporate governance code is due for an update in 2026, driving anticipation for juicier shareholder returns. The revisions are likely to target idle cash holdings, an area Takaichi has said she wants to address.“We think the Financial Services Agency and Tokyo Stock Exchange are going to start putting pressure on companies who have over a certain level of cash on their balance sheet,” said Polar Capital’s Smith. If cash-rich companies boost shareholder payouts or invest in growth, Japanese stocks will become more attractive, he said.Some companies may reallocate cash to mergers and acquisitions. That would further fuel Japan’s ongoing deals boom, wrote Morgan Stanley MUFG Securities Co strategists including Sho Nakazawa in a report. “We hope to see not only a review of balance-sheet management but also an acceleration of initiatives to raise profitability,” including M&A, R&D and wage increases, they wrote.M&A activity this year attracted domestic and global activist investors seeking hidden value. Japan saw 171 activist campaigns in 2025, the most ever, according to Bloomberg Intelligence. Continuing AI boom2026 stocks to watch: Robotics firms like Fanuc Corp, Yaskawa Electric Corp.2025 winner: Memory chip-maker Kioxia Holdings Corp, which has risen 558% year-to-date, making it the Topix’s best performerDemand for AI and data centres is set to keep growing next year, despite jitters over tech giants’ heavy spending. Those concerns dragged some of 2025’s biggest AI winners, notably SoftBank Group Corp, which was lower in recent months, though Masayoshi Son’s investment powerhouse remains up 90% year-to-date.“The theme of AI will continue to attract attention, but the main battleground may start to shift,” said Rina Oshimo, senior strategist at Okasan Securities Group Inc. Firms that can harness AI in areas like robotics and medical technology will be investor favourites next year, she predicted. Robot maker Fanuc has already gained 20% since announcing an AI tie-up with Nvidia Corp earlier this month.But next year’s AI rally may be harder to navigate as Japan’s benchmarks are now heavily weighted toward the sector, said Chen Hsung Khoo, a portfolio manager at Franklin Templeton Investments.“We are very careful what we pay for,” said Khoo. “AI is so capital-intensive, but the opportunities are so far out — the uncertainty is high.” He’s betting on firms with diversified AI exposure, like Ebara Corp., which makes equipment for both semiconductors and energy generation. Yen and BoJ2026 stocks to watch: Carmakers and other exporters2025 winner: Megabank Mitsubishi UFJ Financial Group Inc, which rose more than 30% and was among the biggest contributors to the Topix’s gainsThe yen is ending 2025 far weaker against the dollar than many expected, providing a strong tailwind for exporters such as automakers and trading houses. That trend will likely endure in 2026, said Mitsubishi UFJ Trust’s Oshikubo. The yen has risen less than 1% against the dollar year-to-date as of December 25.“The BoJ’s hikes don’t really impact the yen, as the market has already priced in two hikes a year,” he said. “I expect the yen will still be around the 150-160 level this time next year.”That bodes well for large-cap exporters, which Oshikubo expects to outperform the benchmark in 2026.However, JPMorgan Chase & Co strategists including Rie Nishihara warned that “excessive yen depreciation” poses a “major risk” for equities, noting 165 per dollar marks a breakeven for real income growth.Gradual BoJ rate hikes may not revive the yen, but together with climbing government bond yields, they remain a tailwind for Japan’s banking stocks, said Franklin Templeton’s Khoo.“The earnings power of banks continues to be underestimated by the market,” Khoo said. “They’re undervalued, so remain a compelling case for us.” 

The bearish chorus on the yen is growing louder after the Bank of Japan (BoJ)’s latest interest rate hike failed to deliver a sustained lift to the currency, reinforcing views that there’s no quick fix for its structural weakness.Strategists at JPMorgan Chase & Co, BNP Paribas SA and other firms see the yen weakening to 160 per dollar or beyond by the end of 2026, driven by still-wide US-Japan yield gaps, negative real rates and persistent capital outflows. The trend will likely persist as long as the BoJ tightens only gradually and fiscal-driven inflation risks linger, they say.This year the yen eked out a small gain of less than 1% against the greenback after four straight years of declines, as a hoped-for turnaround on the back of BoJ rate hikes and Federal Reserve cuts proved underwhelming. The currency briefly strengthened past 140 per dollar in April before losing momentum amid uncertainty over US President Donald Trump’s tariff policies and rising fiscal risks tied to political shifts in Japan. It’s now trading around 155.70, not far from this year’s low of 158.87 — around where it began the year in January.“The yen’s fundamentals are quite weak, and that should not be changing much going into next year,” said Junya Tanase, chief Japan FX strategist at JPMorgan, who holds the most bearish end-2026 dollar-yen forecast on Wall Street at 164. He said cyclical forces could turn more yen-negative next year, limiting the impact of BoJ tightening as markets price in higher rates elsewhere.Overnight index swaps show the next BoJ rate hike isn’t fully priced in until September, while inflation remains above the central bank’s 2% target, adding pressure on Japanese government bonds.Carry trades have also re-emerged as a headwind. The popular strategy of borrowing the low-yielding yen to invest in high-yielders such as the Brazilian real or Turkish lira has made it harder for the Japanese currency to rebound. Leveraged funds were the most bearish on the yen since July 2024 in the week through December 9, according to Commodity Futures Trading Commission data, and largely maintained those positions in the following week.Global macro conditions next year should be “relatively supportive for risk sentiment, and typically in that environment that we think would benefit carry strategies,” said Parisha Saimbi, EM Asia FX and rates strategist at BNP Paribas, who expects the dollar-yen to rise to 160 by the end of 2026. Resilient carry demand, a cautious BoJ and a potentially more hawkish-than-expected Fed could keep the pair elevated, she added.Japan’s outbound investment flows remain another source of pressure. Retail investors’ net purchases of overseas stocks via investment trusts have hovered near last year’s decade-high of ¥9.4tn ($60bn), underscoring households’ continued preference for foreign assets — a trend analysts say could persist into 2026 and weigh on the yen.Corporate outflows may be an even more durable driver. Japan’s outward foreign direct investment has continued at a steady pace in recent years, largely unaffected by cyclical factors or rate differentials, BofA Securities chief Japan FX and rates strategist Shusuke Yamada wrote in a note earlier this month. In particular, outward M&A volumes by Japanese firms have hit multi-year highs this year, he wrote.“The weak yen situation hasn’t changed at all. The key point is that the BoJ isn’t hiking rates aggressively, and real interest rates remain deeply negative,” said Tohru Sasaki, chief strategist at Fukuoka Financial Group Inc, who sees the dollar-yen pair reaching 165 by end-2026. “I think the Fed is pretty much done with rate cuts. If the market starts pricing that in, it would become another factor pushing up dollar-yen.”Still, some yen watchers remain convinced that the currency will appreciate over the longer term as the BoJ continues to normalise its policy. Goldman Sachs Group Inc sees the yen eventually strengthening toward 100 per greenback over the next decade, while acknowledging that there are multiple near-term negatives.Risks of official intervention are also back in focus as the yen trades near levels that previously triggered action. Japanese officials, including Finance Minister Satsuki Katayama, have stepped up warnings against what they describe as excessive and speculative FX moves. Still, intervention alone is unlikely to lift the yen out of doldrums, analysts say.“Overall, the market remains jittery and volatile, and ‘smoothing’ operations alone might not be able to alter the yen’s depreciation trend,” said Wee Khoon Chong, senior APAC market strategist at BNY. “The near-term market focus remains on the government’s forthcoming fiscal strategy.” 

The Japanese yen’s renewed weakness is testing the patience of policymakers in Tokyo and unnerving investors.The currency fell to 154.79 against the dollar on November 12, its lowest level in around nine months, following recent declines largely prompted by the emergence of Sanae Takaichi as Japan’s new leader. Takaichi’s focus on boosting economic growth has fuelled expectations she will be reluctant to prod the Bank of Japan to raise interest rates — a move that would support the yen.If the central bank waits longer to increase borrowing costs, the government may be forced to wade into currency markets to prop up the yen. Officials have indicated they are keeping a close eye on currency market movements, a typical first step before direct intervention.While Japan is committed to international pacts that stipulate markets should determine exchange rates, the Group of 20 has acknowledged that excessive or disorderly currency moves can threaten economic and financial stability, giving members wiggle room to intervene when volatility spikes. Japanese officials insist it is sharp or disorderly movements — not any specific exchange-rate threshold — that trigger intervention.The question now is how far — or how quickly — the yen needs to fall before Tokyo steps in to protect it.Why is the yen’s weakness cause for concern?While the yen’s slide over the past decade or so has transformed Japan into an affordable travel destination for millions of foreign tourists and boosted the profits of the nation’s biggest exporters, its weakness has become acute.For an economy heavily dependent on imported energy and raw materials, the feeble yen drives up costs, fuelling inflation for households and squeezing margins for domestically focused businesses. The resulting cost-of-living crunch has already helped bring down two prime ministers.There’s another reason why Japan’s government may want to act. President Donald Trump has repeatedly criticised Japan for its weak currency, arguing it gives Japanese manufacturers an unfair trade advantage. That’s a point that came up in trade negotiations between the two nations.What is currency intervention?When a country’s central bank steps into the foreign exchange market with the intention of strengthening or weakening its currency, that’s known as direct intervention.In Japan’s case, the Finance Ministry decides when to act and the BOJ carries out the operation via a limited number of commercial banks. Japan will either buy yen or sell dollars to strengthen the local currency or sell yen and buy dollars to weaken it. The scale of the transactions depends on how much impact the ministry seeks and how quickly the market reacts.Where does the money come from?When Japan intervenes to prop up the yen, the dollars typically come from its foreign reserves in the form of cash or US Treasury holdings. As of the end of October, Japan had $1.15tn in foreign currency. During last year’s interventions, for example, Japan appeared to sell some US Treasuries from its reserves to help finance the action.How effective is currency intervention?Intervention is a clear way for the government to tell speculators it won’t allow its currency to go into free fall or rocket up. However, it only offers a temporary fix unless economic fundamentals driving the trend are also addressed. In addition, foreign reserves are generally there to protect the economy in the event of a major financial shock or unexpected event, not to artificially prop up the currency. A unilateral move is still seen as unlikely to turn the tide of currency momentum, but it can buy time until market dynamics change.How often does Japan intervene in its currency market?Japan has exchanged vast amounts of money over the years — usually to weaken the yen. But recent intervention has been in the opposite direction. The government spent a total of almost $100bn on yen-buying to prop up the currency in 2024. On each of the four occasions the exchange rate was around 160 yen per dollar, setting that level as a rough marker for where action might take place again.To keep traders guessing, officials often don’t immediately confirm an intervention. But the ministry discloses the amount spent on intervention at the end of each month. Generating doubt and fear of losses in the market is part of the ministry’s strategy, making the comments of officials highly potent.What is verbal intervention?To keep traders on guard and slow movements in markets, senior officials can make remarks that hint at the prospect of intervention and bloody noses for market players. Comments by the finance minister or the ministry’s top currency official can quickly scare speculators. Officials typically use a carefully calibrated set of expressions to ratchet up their warnings and show how close they are to moving. References to “taking action” suggest intervention is close.What are the flow-on effects of monetary intervention?When Japan’s authorities intervene in currency markets, the immediate impact is typically sharp. Past episodes show the yen jumping around 2 yen against the dollar within seconds and 4 to 5 yen within hours.These abrupt swings can cause huge losses for traders making speculative bets that the currency will keep moving in the previous direction. Sharp moves can also cause headaches for businesses trying to price goods, make payments and hedge against exchange rate fluctuations.For the government, intervention also carries political and diplomatic risks. It can draw criticism for currency manipulation, especially when intervention is aimed at weakening the yen, a direction that can help exporters with trade. That charge is harder to argue when Tokyo acts to support the yen.What is the US stance on a weak yen?Trump accused Japan’s leaders of guiding the yen lower to gain a competitive advantage in early March and said tariffs were the solution. Japan remains on the US Treasury Department’s “monitoring list” for foreign-exchange practices after posting trade and current account surplus against US, but doesn’t fulfil all the conditions to be characterised as a currency manipulator.Tokyo and Washington issued a joint statement in September, in which the two finance chiefs reaffirmed that intervention “should be reserved for dealing with excess volatility or disorderly movements” and not for competitive advantage. Still, Treasury Secretary Scott Bessent on October 7 said Japan’s government needed to give the central bank space to manage volatility — comments seen as a warning against excessive weakness in the yen.Any intervention would take place after prior notice to the US and if it ended up strengthening the yen, it may be tacitly welcomed by the Trump administration.

Bank of Japan (BoJ) Governor Kazuo Ueda kept his policy options open by reiterating the bank’s long-held stance on interest rates, avoiding sending any clear signals about the prospects for a rate hike when the board meets later this month.“If the baseline scenario for economic activity and prices outlined so far is realised, the bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate,” Ueda said Friday in a speech to local business leaders in Osaka.Ueda refrained from telegraphing any policy changes after market speculation over an impending rate hike gained momentum in recent weeks. Two board members dissented from the decision to hold settings steady last month, and a member considered dovish cited the heightened need for policy change in a speech earlier this week.Instead, Ueda took a more neutral tack by highlighting the factors officials are monitoring as they mull the timing for a rate shift.“To determine whether economic activity and prices are improving, the bank will, for the time being, monitor factors such as the points I mentioned,” Ueda said, citing the global economy — especially the US economy — and the impact of US tariffs on Japan’s corporate profits as factors to watch. He added that wage and price trends including food inflation required attention.The yen weakened as much as 0.4% to 147.82 against the dollar after Ueda spoke.“Some dovish comments from Ueda have prompted selling of the yen,” said Akira Moroga, chief market strategist at Aozora Bank. “While the market had expected Ueda to sound more hawkish, the governor refrained from taking an aggressive posture toward rate hikes.”Still, the mere reiteration of the existing policy stance will likely keep alive market speculation over a rate hike when authorities next set policy on October 30, as the governor refrained from backing or opposing such notions.Pricing in the overnight swaps market shows that traders see about a 56% chance for a move at that meeting, up sharply from around 22% early last month, though down from levels seen earlier in the week.The annual Osaka conference tends to be where BoJ governors deliver one of their most important speeches of the year. Friday’s event comes days after the central bank released its latest Tankan survey — the first time since 2013 that the key speech followed the quarterly survey. The timing fuelled market speculation that the bank might wish to lay the groundwork for a hike after examining the closely watched dataset. It showed business sentiment at a solid level.“Given the corporate sentiment until now, we can say that the likelihood is rising for our economic outlook to be realised,” Ueda told reporters later Friday. “But, looking ahead, it doesn’t give us strong information over the future impact of US tariffs.”Japan’s inflation has stayed at or above the BoJ’s 2% target for more than three years. Ueda has justified a gradual approach to rate hikes by explaining that the underlying trend remains shy of the target.At the September meeting, board members Naoki Tamura and Hajime Takata called for hiking rates. It was the first time in Governor Ueda’s tenure that more than one member had dissented from a vote to hold steady.Ueda didn’t cite political uncertainty among the factors he’s monitoring, but it’s likely he’ll be closely watching when the ruling Liberal Democratic Party selects a new leader on Saturday.Sanae Takaichi, a top contender for the party race and an advocate of monetary easing, said borrowing costs shouldn’t be raised while the other four candidates said monetary policy should be left to the central bank, Kyodo News reported Thursday, citing a survey.Another emerging uncertainty comes from a US government shutdown that began Wednesday. Economic data releases from the US are expected to be delayed as a result, including the unemployment report scheduled for Friday.“It’s a severe problem,” Ueda said. “We just have to gather information by various ways and make a decision” if the absence of data lasts until the October meeting, he said.