iShares ETFs cover a broad range of asset classes, risk profiles and investment outcomes. To understand the appropriateness of our funds for your investment objective(s), please visit our product webpages.
iShares MSCI Japan ETF (IJP)
https://www.blackrock.com/au/products/273434/
This product is likely to be appropriate for a consumer:
• who is seeking capital growth
• using the product for a core component of their portfolio or less
• with a minimum investment timeframe of 5 years, and
• with a medium to high risk/return profile
Japanese equities soared to record highs in 2025, on the back of domestic political support and growing investor interest in diversifying outside the US. We explore why this trend may be set to continue and consider potential downside risks.
Key takeaways
-
01
Japan’s key stock market indices grew to record highs last year, with Australian investor inflows to Japanese equities tripling as nerves around US market concentration took hold
-
02
We’re positive on the outlook for Japanese shares heading into 2026, as further shareholder reforms and the new prime minister’s fiscal program support expansion of the domestic economy, while acknowledging that market outcomes will depend on broader global conditions
-
03
Investors could consider increasing their exposure to Japanese equities through the MSCI Japan Index, which offers diversification into sectors less prominent in the Australian and US markets and will benefit from a potential rise in the Japanese yen
Why Japan is back in focus
Amid worrying headlines around tariff uncertainty and the tech sector approaching bubble territory, we saw investors cool on US equities last year and reignite their interest in Asia. Japan stood out as a particularly positive investment story, as the surprise election of Sanae Takaichi as prime minister ushered in a new era of fiscal support and Japan’s phased shareholder reforms continued to take shape.
These trends fuelled Japanese equities to record highs last year, with the Topix 100 Index breaching 3000 points and the Nikkei 225 rising above 50,000 late in 2025.1 They also drove buoyant inflows to Japanese equities among Australian investors, with the iShares MSCI Japan ETF (IJP) gathering more than $340 million in net flows last year – almost triple the fund’s 2024 flow numbers.2
Inflows to the MSCI Japan ETF (IJP), 2024 vs 2025
Source: BlackRock data as of 15 December 2025. Note 2025 figures are from 1 January – 15 December 2025
Looking ahead to the new year, we expect continuing investor interest in Japan and other Asian equity markets. A recent BlackRock client survey in late 2025 indicated around 40% of respondents intended to increase their exposure to share markets in the Asia Pacific region heading into Q1 2026.3
So as investors search for new growth opportunities beyond the US, do the fundamentals in Japan stack up for another strong year of returns?
Can the Takaichi trade last?
Much like the so-called ‘Trump trade’ of late 2024, the ‘Takaichi trade’ fuelled investor optimism on Japan last year due to the incoming prime minister’s dovish monetary policy leanings and ambitions to support economic growth through a program of tax cuts and subsidies. The question is whether the prime minister can deliver on these plans, given the need for her ruling Liberal Democratic Party to negotiate with independents and coalition partners, the Japan Innovation Party.
So far the parties’ alignment of interest on economic stimulus seems to be holding, with the Japanese Cabinet approving a US$135 billion stimulus package – the largest since the pandemic – in November last year.4 While bond markets reacted negatively to the expanding government debt, we expect the spending package to support domestic demand into the new year, with more policy stimulus likely.
One of the main risks around Takaichi’s policy stance that has concerned markets is the impact on inflation, with November 2025 figures indicating a 3% increase in consumer prices, ahead of the Bank of Japan’s 2% target rate.5 Although CPI has moderated from close to 4% earlier in 2025, the Bank of Japan has now resumed hiking interest rates, which it largely held off doing in 2025 as uncertainties around global trade played out.
Japan inflation measures
Source: BlackRock Investment Institute/LSEG Datastream data, 17 December 2025
Looking ahead, we anticipate the central bank will proceed cautiously and rely on data, with one more rate increase expected in Q3. BoJ Governor Ueda has stated inflation must be sustained by domestic wage growth to justify further hikes.6 Although rising goods prices have hurt real wages, Japanese unions plan to push for significant pay raises this year, with negotiation outcomes typically announced in March.7
The Tokyo Stock Exchange reforms that have driven increased investor interest in Japan over the last few years are also set to move into a new phase in 2026, with companies being delisted that have not made sufficient improvements to earnings growth and capital efficiency. The Japanese Financial Services Agency will also revise its corporate governance code this year, with a focus on effective capital allocation and better use of cash for investment.
Modernisation has driven significant reform to Japan’s equity market in recent years, with shareholder distributions more than tripling over the past decade.8 While Japanese share valuations are currently at the higher end compared to history, the reforms may ultimately see the local equity market – which has been chronically undervalued compared to developed market peers – re-rated higher on a long-term basis.
Valuations: Japan vs global peers
Compared to more stretched valuations in the US and Australia, Japanese equities also look relatively cheap, as seen in the chart below.
Equity valuation by market
Source: BlackRock Investment Institute/LSEG Datastream data, 16 December 2025
Accessing growth in Japan
As well as offering a compelling tactical investment case in 2026, Japanese equities can also provide useful long-term diversification opportunities for Australian portfolios.
For those holding broad global equities exposure through an index such as MSCI World, Japanese equities are under-represented, making up less than 6% of the index weighting. As such, investors may wish to use a single-country ETF like IJP to dial up their exposure to Japanese shares if valuations are looking appealing.
The MSCI Japan Index tracked by IJP also provides access to sectors that may be under-represented in local investor portfolios. With a 25% weighting to industrials and 17% weighting to consumer discretionary, the index may offer complementary exposure to the Australian share market which is dominated by financials and materials, as well as tech-heavy US equities.9
As an unhedged exposure, returns in IJP can fluctuate with movements in the Japanese yen. As the Bank of Japan potentially resumes its rate hike path in 2026, this may work to investors’ benefit versus currency hedged ETFs, as we may see the yen appreciate when interest rates rise.
The bottom line
Overall, with a strong program of fiscal support providing tailwinds to the domestic economy, and reforms having an ongoing positive impact on the equity market, we see Japan continuing to attract interest as investors search for new growth opportunities in Asia.
