Stocks don't always go up because of a splashy new product launch or a charismatic new CEO. Sometimes stocks go up for unglamorous reasons and subtle shifts behind the scenes. One big example of this is the Japanese stock market.
Just in the past few years, Japan's Nikkei 225 index has recovered from several "lost decades" that followed the 1989 stock market crash. The index reached a new all-time high in January. In the past five years, Japan's Tokyo Stock Price Index, commonly known as the TOPIX index, is up 93.3% and the Nikkei 225 index is up 84.3% -- both outperforming the S&P 500 index, which is up 79.2%.
But why are Japan stocks going up? A big reason is something that most everyday investors might take for granted: good corporate governance.
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Changing Japan's corporate structure
Corporate governance might sound boring, but it's a big reason why the Japanese stock market is delivering exciting returns. The past few years have seen substantial reforms of Japan's corporate governance.
Traditionally, major Japanese companies would sometimes get too cozy with each other -- they owned each other's shares and didn't focus enough on delivering returns to shareholders. The Japanese economy was based on the "keiretsu system," a way of companies forming closely interlinked partnerships, with an emphasis on stability and cooperation.
While Japan's keiretsu system offers benefits, it can also lead to inefficiency, limited competition, and a lack of flexibility and innovation. The system would sometimes protect complacent management teams and prop up underperforming companies -- at the expense of other companies' investors. Buying and holding other companies' shares (also called "cross shareholdings") wasn't always the best way to create value for Japan's shareholders.
Why Japan's stock market is booming
Japan's Financial Supervision Agency (FSA) and the Tokyo Stock Exchange have implemented aggressive new corporate governance reforms. These include discouraging the longtime practice of cross shareholdings. J.P. Morgan research shows that Japanese companies have been selling off their cross shareholdings at an accelerated pace since fiscal year 2020. Since 2023, the Tokyo Stock Exchange has been publishing lists of companies that are improving their capital efficiency measures and sharing best practices to encourage companies to be more conscious of stock price and cost of capital.
These and other corporate governance reforms are driving Japanese companies to be less interconnected and more competitive. There is a new emphasis in Japan on incentivizing companies to be more focused, buy back more stock, divest non-core businesses, and otherwise operate in ways that are more friendly to investors.
How to "buy Japan" in 2026
Japan's new corporate governance reforms are helping to create a leaner, more competitive, more dynamic economy in Japan. An easy way for American investors to "buy Japan" is to invest in the iShares MSCI Japan ETF (EWJ 0.73%). This exchange-traded fund has outperformed the S&P 500 index in the past year -- the EWJ is up 25.9% while the S&P 500 is up 13.7%.
NYSEMKT: EWJ
Key Data Points
When you buy the iShares MSCI Japan ETF, you get 181 holdings in Japan's top companies. The ETF's top holdings include globally recognized Japanese auto and electronics brands like Toyota and Sony, major industrial companies like Hitachi and Mitsubishi, and big financial services firms like Sumitomo Mitsui Financial Group, Mizuho Financial Group, and Mitsubishi UFJ Financial Group. Own the biggest companies in Japan for an expense ratio of 0.49%.
Buying the iShares MSCI Japan ETF could be a smart choice for international stock investors in 2026.
