Why Japanese Stocks Are Ranking Among Global Top Performers in 2026

When it comes to international equity markets, Japanese stocks have emerged as standout performers in recent years. The remarkable resurgence of Japan’s capital markets deserves closer attention from global investors, particularly those seeking exposure to well-governed, increasingly competitive companies. Over the past five years, Japan’s TOPIX index has surged 93.3% and the Nikkei 225 has climbed 84.3%—both substantially outpacing the S&P 500’s 79.2% gain.

What makes this Japanese market rally particularly noteworthy is that it stems not from flashy product launches or charismatic leadership changes, but rather from systematic, behind-the-scenes transformations in how corporations operate and prioritize shareholder value.

The Top Driver: Corporate Governance Evolution

The primary engine fueling Japan’s stock market recovery centers on a fundamental shift in corporate governance practices. For decades, major Japanese companies operated under the traditional keiretsu model—a system of closely interconnected partnerships emphasizing stability and mutual cooperation. While this approach offered certain advantages, it frequently resulted in inefficiency, limited competitive pressure, and a lack of innovation. Companies sometimes prioritized maintaining relationships over maximizing shareholder returns.

A critical component of this system involved cross shareholdings, where Japanese corporations would hold significant stakes in one another. This practice, while reinforcing business stability, often created value destruction rather than value creation for equity investors. The old model frequently insulated complacent management teams and protected underperforming enterprises at the expense of shareholders in stronger companies.

Three Key Mechanisms Driving the Japanese Stock Turnaround

Japan’s Financial Supervision Agency (FSA) and the Tokyo Stock Exchange have spearheaded aggressive corporate governance reforms that are fundamentally reshaping the business landscape:

First, the acceleration of cross-shareholding divestitures. Since fiscal year 2020, J.P. Morgan research demonstrates that Japanese corporations have been systematically unwinding their cross-shareholding positions at an accelerated pace. This trend represents a meaningful departure from decades of entrenched practice.

Second, the transparency and benchmarking initiatives. Beginning in 2023, the Tokyo Stock Exchange began publishing lists of companies demonstrating measurable improvements in capital efficiency. This public ranking system encourages peer competition and incentivizes management to focus on stock price performance and cost of capital considerations.

Third, the shift toward shareholder-friendly capital deployment. Companies are increasingly authorized and encouraged to repurchase shares, divest non-core business units, and streamline operations in ways that directly benefit equity holders. This represents a meaningful cultural shift in Japanese corporate finance.

Top Japanese Companies Leading the Market Transformation

The benefits of these governance reforms become particularly evident when examining Japan’s leading publicly traded enterprises. The iShares MSCI Japan ETF (NYSEMKT: EWJ) provides easy access to Japan’s premier companies, holding 181 positions across the nation’s largest corporations.

The fund’s most significant holdings represent globally recognized industrial powerhouses:

• Automotive and electronics leaders: Toyota and Sony continue to dominate global markets while adapting to evolving consumer preferences
• Advanced manufacturing: Hitachi and Mitsubishi represent Japan’s deep expertise in complex industrial systems
• Financial services powerhouses: Sumitomo Mitsui Financial Group, Mizuho Financial Group, and Mitsubishi UFJ Financial Group provide comprehensive banking and investment services

This diversified exposure comes with a competitive 0.49% expense ratio, making it an accessible vehicle for international investors.

Quantifying the Investment Case for Japanese Equities

Recent performance metrics underscore the compelling investment opportunity. In the most recent 12-month period, the iShares MSCI Japan ETF has delivered 25.9% returns while the S&P 500 advanced 13.7%. This substantial outperformance reflects the market’s recognition of Japan’s corporate transformation and improved capital efficiency.

To contextualize the long-term investment potential of Japanese markets, consider the historical track record of well-positioned equity positions. When Netflix appeared on major analyst “best stocks to buy” lists in December 2004, an initial $1,000 investment would have grown to $461,527. Similarly, Nvidia’s inclusion on such lists in April 2005 would have transformed a $1,000 position into $1,155,666 by January 2026. While past performance offers no guarantees, these examples illustrate the wealth-creation potential of identifying transformative market trends early.

The Motley Fool Stock Advisor program tracks such opportunities, generating average returns of 950%—substantially exceeding the S&P 500’s 197% return, demonstrating the value of disciplined stock selection in capturing market-beating performance.

Positioning Your Portfolio for Japan’s Ongoing Renaissance

For international equity investors evaluating their 2026 portfolio allocation, Japanese stocks merit serious consideration. The combination of governance reforms, demonstrated outperformance, and exposure to world-class companies creates a compelling investment case.

The iShares MSCI Japan ETF represents a practical, diversified approach for capturing this opportunity. By gaining exposure to Japan’s top-tier companies undergoing genuine operational transformation, investors position themselves to participate in what may prove to be one of the decade’s most significant market transitions.