Why Japan’s stock market can keep rising

Subscribe to enjoy similar stories. Japan was a global bright spot in 2025. Despite much hand-wringing over its debt burden, it is likely to remain so in 2026.

The county is firmly in a reflation phase with growth, wages and prices all in an upcycle. The Bank of Japan has responded by raising interest rates to their highest level in three decades, prompting some concern among commentators and investors. But this should be seen as a strong vote of confidence in the Japanese economy, which has proven resilient to tariffs and global shocks.

The benchmark Nikkei 225 index is up 26% so far this year, far better than the S&P 500’s 17% rise. Normally, investors would expect to see these gains diluted in dollar terms by a weakening yen. In past cycles, the Nikkei has typically gotten a boost from yen depreciation, which increases the profits of Japanese exporters.

The yen has weakened recently, causing market jitters. But for 2025 as a whole it is still basically flat against the dollar. Japan’s outperformance is partly due to its still-important role in the global tech supply chain, allowing it to benefit from AI optimism.

It is also attributable to successful corporate-governance reforms, dating back to Shinzo Abe’s second stint as prime minister from 2012 to 2020. Those have boosted corporate efficiency and financial returns. The main cause for worry is Japan’s famously high debt burden.

Total public debt stands at a whopping 200% of gross domestic product. On top of this, rates on Japanese government bonds have been on the rise in response to tighter BOJ policy and stimulus spending. A package of tax cuts and fiscal spending from newly installed Prime Minister Sanae Takaichi is worth around 3.4% of GDP, according to Fitch