Time to invest in Japan? The largest UK funds and trusts to gain exposure to Japanese equities

Key points

• Japan equities have been on a stellar run this week with the Nikkei 225 scaling fresh all-time highs

• Prime minister Sanae Takaichi’s landslide win has driven a wave of optimism on top of structural improvements to the market, but the rally may be fragile and risks remain

• Currency risk is a key factor for UK investors - here we outline some factors to consider plus some funds and trusts that offer ISA-ready exposure to Japan

Japan has moved back onto investors’ radar. Corporate reforms, shareholder-friendly policies, a weak yen, and improving inflation dynamics have all helped revive interest in the world’s third-largest economy.

Global investors have been warming to Japan for some time now but ratcheted up another level following the surprise landslide victory for the ruling Liberal Democratic Party in a snap election. The victory gives prime minister Sanae Takaichi a super-majority in the lower house and it’s possible this could give her free rein to carry out more economic stimulus, growth-friendly policies and fiscal expansion. The Nikkei 225 rallied above 57,000 for the first time before finishing up 4% in the session after the election result, indicating strong investor sentiment towards the government’s economic agenda.Japan’s stock market is closed Wednesday for a holiday after the Nikkei hit a high of 57,960 on Tuesday, rising about 15% so far this year.

Why Japan now?

Several structural shifts are changing the investment case:

1) Corporate governance reform

• Tokyo Stock Exchange pressure on companies to improve returns and reduce cross-shareholdings.

• Higher share buybacks and dividends.

• Greater focus on return on equity.

2) End of deflation

• Japan is moving toward sustained inflation and wage growth.

• Supports earnings and pricing power after decades of stagnation.

3) Yen dynamics are key

• A weak yen boosts exporters and foreign investor returns but may not translate directly in GBP returns as much due to the weakness in JPY

• Currency swings remain a key driver of UK investor outcomes. In JPY the Nikkei 225 has risen 108% over the last five years, but is just +17.6% in GBP in that period (Source: Bloomberg).

4) Global diversification

• Japan offers exposure to robotics, automation, semiconductors, and precision manufacturing.

• Lower correlation with US mega-cap tech than many investors assume.

And now, 5) Political certainty + fiscal and economic policy tailwinds

Investors have welcomed the prospect of increased spending, tax relief and a government with a strong mandate to pursue its assertive economic agenda.

The government has consistently framed its agenda around “responsible and proactive” fiscal expansion with an emphasis on investment-led growth. In practice, that points to potential support for areas tied to defence, AI and digital infrastructure, semiconductors, and strategic supply chains/critical materials (including rare-earth-linked themes), alongside broader spending aimed at reinforcing economic and national security priorities.

Risks remain of course.

The rally in Japanese equities could be susceptible to swings in the yen, which has grown vulnerable to sharply rising Japanese government bond yields. A weak yen has been a key plank of the long-Japanese-equities trade and it could strengthen in the coming months. If the yen appreciates it would tend to bring down equity valuations. However, since the landslide election at the weekend the yen has strengthened alongside the rally for Japanese, which could indicate some positive (for UK investors) decoupling between the exchange rate and stock market. If this indicates political stability premia it may be a positive indicator.

The durability of the recent movelargely depends on the bond market. If fiscal headlines quickly re-ignite JGB volatility — especially at the super-long end — equities may shift from a broad rally to a sector-rotation market. Although debt-to-GDP is trending in the right direction, it remains the highest in the world and therefore Japan remains exposed to fiscal risk should the government mis-step.

The rally has also stretched valuations and resulted in widening gulf between fundamentals and the price action. Japan’s economic performance has lagged peers – shrinking 0.4% in the three months to September. 

Not to mention that with the Nikkei trading at a record high already, there is a high bar to exceed expectations and there is a risk that the government’s honeymoon is short and ultimately leads to disappointment.

Japan’s heavy index weighting to manufacturing and capital goods has ensured it’s been one of the big beneficiaries of the AI boom and global rise in equity markets driven by this trend. This could make it sensitive to AI bubble risks, albeit the YTD rally seems to suggest there are other supporting factors.

Nevertheless, for investors new to Japanese stocks, here’s an outline of how you could gain exposure to Japan.

For UK investors, the question is practical: how do you actually get exposure?

1) Japan ETFs

For most investors, UCITS ETFs listed in London are the easiest and cheapest entry point to build exposure to Japan and increase diversification.

Major UCITS Japan ETFs

iShares Core MSCI Japan IMI UCITS ETF (SJPA/SJPE): Tracks the IMI (Investable Market Index), covering large, mid, and small-cap Japanese stocks, this is highly diversified across the breadth of the Japanese equity market.

iShares MSCI Japan UCITS ETF (IJPN/CJPU): Tracks the MSCI Japan Index, focusing on large and mid-cap companies. Like the iShares version above the largest holdings are Toyota Motor Corp, Mitsubishi UFJ Financial and Hitachi.

Vanguard FTSE Japan UCITS ETF (VJPN/VJPB): Provides broad exposure to large and mid-cap Japanese equities.

Xtrackers MSCI Japan UCITS ETF (XMJP/XMUJ): A popular alternative tracking the MSCI Japan.

Currency-hedged ETFs

• Reduce the impact of GBP/JPY moves.

• Useful if you want “pure” equity exposure.

Options like iShares MSCI Japan GBP Hedged UCITS ETF (IJPH) allow investors to hedge JPY exposure back to GBP, mitigating currency risk - this ETF has a three-year price return of 125% vs around 50% for the unhedged IJPN.

Thematic Japan ETFs offer exposure to trends such as robotics and automation, or can be based on strategies such as dividend income vs growth, such as the Global X Semiconductor and MSCI SuperDividend Japan ETFs*.

2) Investment trusts

investment trusts are generally actively managed, allowing managers to select companies with strong growth potential, offering an alternative to passive ETFs.

Active managers may add value in Japan because the market has many under-researched mid/small caps, while corporate reform creates stock-picking opportunities. However returns lately seem to have lagged the passive ETFs that track the broader market.

Key Japan Investment Trusts in the UK:

• Baillie Gifford Japan Trust PLC (BGFD): Aims for long-term growth, primarily in medium-to-smaller companies. This trust has struggled to match returns on the broader index in Japan, with a 3-year return of 21%.

• CC Japan Income & Growth Trust PLC (CCJI)*: Focuses on capital growth and income from a portfolio of Japanese equities with a focus on financials. 

• Schroder Japan Trust PLC (SJG): Invests in Japanese companies to achieve capital growth.

• JPMorgan Japanese Investment Trust (JFJ)*: Actively managed, focusing on high-conviction stock selection. Sony and Advantest are the largest holdings.

• AVI Japan Opportunity Trust (AJOT)*: Targets undervalued Japanese companies.

3) Buying individual Japanese shares

Single name stocks have also drawn interest. Typical UK investor targets include carmakers, tech, AI and certain household names, such as Nintendo.

Advantest has drawn a lot of interest as it’s a play on AI demand. The company, which makes semiconductor test systems to verify that chips function properly, recent posted record quarterly sales and lifted its full-year profit outlook. The company’s growth has seen it become the single largest company on the Nikkei 225, with a significant 12.84% weighting as of Tuesday’s close. Tokyo Electron, which has a 7.22% weighting on the index, is also in the electronics and semiconductor space.

Risks to understand

• Currency volatility: GBP/JPY can dominate short-term returns.

• Economic sensitivity: Japan is export-heavy and tied to global demand.

• Policy risk: Bank of Japan changes (rates, yield curve control) can move markets quickly.

• Value traps: Some companies remain inefficient despite reforms.

For UK investors, the key decisions are:

• ETF vs active vs stock picking, or blending the two with investment trusts.

• Hedged vs unhedged currency exposure – JPY has been very volatile.

• Tactical trade vs strategic allocation. Long term Japan works as a diversifier with a very different sector mix to the US and UK, but this needs to be weighed against valuations, broader tech and AI trends, structural shifts and currency risk.