Japan’s Equity Revival May Still Be in the Middle Innings

GMO argues that Japan’s equity market is undergoing a durable structural transformation driven by governance reform, improving profitability, and shareholder-focused capital allocation. 

• Japanese corporates have materially improved margins, ROE, dividends, buybacks, and earnings growth over the past decade, outpacing nominal GDP growth and even U.S. earnings growth in some periods.
• Despite strong recent returns, Japanese equities still trade at roughly a 20% discount to U.S. equities on forward earnings and remain significantly cheaper on price-to-book and price-to-sales metrics.
• GMO sees the strongest opportunity in Japanese small-value equities, where roughly 40% of TOPIX companies still trade below book value, creating fertile ground for active investors and shareholder engagement.

The report’s broader thesis is that Japan is no longer merely a cyclical trade on yen weakness, but a slow-moving structural re-rating of corporate Japan itself.