CONTRIBUTORS
Dina Ting, CFA
Head of Global Index Portfolio Management,
Franklin Templeton ETFs
Whether you’re focused on “selling America” or buying America again these days, the wisdom of global portfolio diversification should not be overlooked, in our opinion. With that in mind, we believe this may be a good time to delve into the reasons why Japan’s market stands out as investors continue to weigh the opportunities and risks of countries in the shockwave radius of US tariffs.
For starters, there is the long-standing feature of Japan’s heavy investment in US debt, which makes it the largest foreign holder of US Treasury securities. When Japanese Finance Minister Katsunobu Kato was asked in early May whether Japan’s commitment to not offload US Treasuries could be used as leverage in trade negotiations, he reportedly replied, “It does exist as a card.” And added, “Whether we choose to use it or not would be a separate decision.” So there’s that.
In recent decades, Japanese companies have not only established local US operations, they have also extended their global footprint to reduce dependence on any single market. Consider that nearly one-third of all vehicles produced in the United States are those of Japanese-brand automakers.1
Despite its ongoing—though hardly exclusive—demographic challenges, Japan’s dominance in the international business landscape is widely attributed to its effective globalization strategy. Even with the United States as Japan’s top trading partner, the country’s 2024 US-bound exports constituted just about 21% of its overall exports.2
Prompting the more shareholder-friendly transformation of “Japan Inc.”3 has been the surge in vocal and assertive investors who have pushed its conglomerates, including the country’s major trading houses, to implement such changes as progressive dividend policies.
Japanese companies announced share buybacks in April that were nearly triple that of 2024. Listed groups in the Tokyo Stock Price Index (TOPIX) benchmark collectively unveiled US$27 billion of buybacks for the month, up from approximately US$8.45 billion in the same month last year.4
Japan’s most prominent banks have also announced plans to buy back shares, which may be a boon for these institutions later this year when analysts anticipate the country may (at long last) continue on its path of raising rates.
Despite some investor perceptions, Japanese stocks, as measured by the Nikkei 225 Index, have delivered strong local returns of more than 8% annualized over the past 10 fiscal years. Solid earnings growth fueled the upward trend in both dividends per share and underlying price returns during that time.5 To boot, as of April 22, 2025, Japan’s Nikkei 225 Index offered a higher dividend yield than not only the United States’ but also most G7 peer indexes.6
Japan has Higher Dividend Yields than Their US Counterparts
As of April 22, 2025
Source: Bloomberg. The Nikkei 225 is a price-weighted equity index, which consists of 225 stocks in the Prime Market of the Tokyo Stock Exchange. The Russell 2000 Index is a small-cap US stock market index that makes up the smallest 2,000 stocks in the Russell Index. The Nasdaq, Russell 2000 and Nikkei 225 indexes have distinct differences in terms of their composition, weighting method, sector representation and performance, with the Nasdaq heavily focused on technology and growth companies. The Nikkei 225 is dominated more by IT and consumer discretionary sectors compared to the more diversified sector representation of the Russell Index.
G7 Economies: Dividend Per Share (DPS)
March 31, 2015 to March 31, 2025
Sources: FactSet, MSCI, FactSet Market Aggregates. The MSCI country indexes are market capitalization-weighted indexes that track the performance of equity markets in specific countries, regions or globally. LTM (Last Twelve Months) Dividend per Share means the total amount of dividends a company paid out over the past 12 months, divided by the total number of shares outstanding.
In US dollar terms, Japan’s TOPIX stock gauge has also outperformed the United States, up 8.66% versus a decline of -1.05% for the Dow Jones US Total Stock Market Index year-to-date (as of May 21, 2025).7
MSCI Japan: Dividend Per Share (DPS) and Price Index
March 31, 2015 to March 31, 2025
Sources: FactSet, MSCI, FactSet Market Aggregates. The MSCI Japan Index is designed to measure the performance of the large- and mid-cap segments of the Japanese market. Calculations are based on quarterly LTM (Last Twelve Months) DPS (Dividend per Share) in Japanese yen and indexed to 100. DPS means the total amount of dividends a company paid out over the past 12 months, divided by the total number of shares outstanding.
Labor progress
In our analysis, we see encouraging signs of Japan’s economy normalizing again, given its stronger growth outlook and higher inflation following decades of deflationary doldrums. Stronger wage growth is also expected to usher in more household consumption. Japan’s nominal gross domestic product for 2025, is projected to constitute about 3% of the global economy, up substantially from the 1.2% average during 2015-2019, the years preceding the start of the COVID-19 pandemic.8
In terms of wages, Japan’s labor federation has advocated during recent negotiations for a 5% salary increase for workers of larger companies and a 4% increase for those at small to mid-sized firms.9 To narrow the income disparity and promote wider economic growth, the federation also suggests that larger companies maintain a 5% annual base pay raise and smaller firms should aim for a 6% increase. We are optimistic that these measures could drive more widespread and sustainable real wage growth—a phenomenon not observed in more than 30 years.
Endnotes
- Source: Japanese Automobile Manufacturers Association.
- Source: Trading Economics, 2024.
- Japan Inc. is a term describing Japan's highly centralized economic system and development strategy, characterized by a strong alliance between the government and corporations.
- Source: “Japan’s share buybacks nearly triple as governance push gains pace.” Financial Times. April 30, 2025.
- Source: Bloomberg. The Nikkei 225 is a price-weighted equity index, which consists of 225 stocks in the Prime Market of the Tokyo Stock Exchange. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information. Japan’s fiscal years end on March 31.
- Sources: Bloomberg, FactSet, MSCI, FactSet Market Aggregates.
- Source: Bloomberg. The TOPIX is a capitalization-weighted index that lists all firms in the first section of the Tokyo Stock Exchange. The Dow Jones US Total Stock Market Index is designed to measure all US equity issues with readily available prices. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. See www.franklintempletondatasources.com for additional data provider information.
-
Source: The World Bank and World Economics. There is no assurance that any estimate, forecast or projection will be realized.
-
Source: “2024 Shunto: The First Wage Increase Above 5% since 1991 with an Urgent Need to Spread the Trend to SMEs.” Japan Labor Issues. Winter 2025.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
Diversification does not guarantee a profit or protect against a loss.
ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
WF: 5345271