Japan’s Market Boom Is Just Getting Started. 2 Big Reasons Why.

About the author: Patrick L. Springer is an institutional-equities business developer and Japan and Asia market specialist. He worked at Morgan Stanley in management roles for more than 20 years.

Japan just concluded a 34-year trek in the wilderness of deflation and ended its nearly 20-year negative interest-rate policy. The stock market has responded by achieving new all-time highs, last seen in 1989, rising 35% in the past year.

This might look like the top, but a closer look at Japan’s market suggests that the end is just the beginning for the world’s third-largest market. This year likely marks the beginning of a multiyear Japan market revival that will start a major new capital markets cycle. Japan’s companies are just beginning to celebrate a long-awaited return of pricing power supported by an enamoured global investor base looking for international ideas in a friendly market.

Investors should focus on two trends. First, new micro and macro forces are at work to make Japan a preferred non-U.S. destination for several years. With the U.S. dollar at 20-year highs, portfolio managers know that it is typically time to diversify and buy cheaper overseas markets, but where to go? Europe is cheap but challenging, and the I of India is what currently remains best of the emerging markets BRICS grouping. Exposure to Asia is important for global portfolios given it is 45% of global gross domestic product. Yet strategists say that we now live in a “multipolar world,” a euphemism for the highest level of geopolitical risks in the world in decades. This limits China investment allocations for now.

But Japan is a pre-eminent security partner for the U.S. Japan also is quickly becoming a key partner in U.S. reshoring strategies, especially as an alternative supplier of semiconductors and technology components. The reshoring trend is compounded by the yen’s weakness. At nearly 152 yen to the dollar, Japan’s currency is trading at the lowest ratio since 1990. That means Japan is also likely to regain market share that it lost over the past 20 years to China in automobile components, industrial products, and machinery. Status as a security partner matters to investors now, which will keep allocations to Japan higher for longer.

Second, Japan’s differentiated market structure may provide more alpha-idea opportunities than investors might expect from an older, developed economy. In the U.S., megacaps and the Magnificent Seven rule the world for investors—and for good reason, given their recent outperformance. The high level of exchange-traded fund penetration in the U.S. also favors large-caps over small- and medium-capitalisation stocks. But in Japan, the list of Japan’s largest companies remains unchanged: Excluding SoftBank, all were established pre-1960.

According to Abrdn Investments, 45% of Japan’s benchmark Topix Index of 2000 constituents have no analyst research coverage, compared with just 3% of the Russell 3000 universe for the U.S. As inflation sparks growth, earnings surprises and inflections of Japan’s under researched companies will lead to significantly higher alpha capture opportunities.

Additionally, the Japanese government and the Tokyo Stock Exchange have initiated important corporate-governance reforms, and 26% of all listed companies have submitted specific plans to improve their stock valuation. But many more companies have yet to respond, providing more opportunities for investors.

Sorting Japan’s nearly 3,900 stocks into market segments is revealing. Japanese mid-cap and small-cap stocks have lagged behind large-cap stocks by 40% and 60% year to date, respectively, and have lagged by 25% and 46% on a one-year basis.

Such underperformance by itself is one thing, but for the many investors who have never seen inflation, wage growth, and domestic sales gains in Japan, they may find a discovery universe of new stocks with interesting characteristics such as these:

Organo , a $2 billion market-cap water treatment company that has traded over $60 million a day on some days and counts Taiwan Semiconductor Manufacturing as one of its key growth customers.

Nakanishi , a $1.5 billion dental-equipment and precision-tools maker that grew sales 23% last year, sports a 2.5% yield and a 24% return on equity, and has 12% of its stock price in net cash.

Chugoku Marine Paints , a global top-three maker of marine paints that has a 20% global share and a 15% return on investment capital, sells at nearly 11 times earnings, and has a 2.6% dividend yield.

Overall, this analysis finds nearly 100 companies with a market cap above $1 billion with net cash equal to 20% or more of their stock price.

The bottom line is that Japan’s culture of innovation, combined with an end to deflation, is likely to produce a new wave of capitalisations. During the decades of deflation, corporates and consumers alike were incentivised to save more, spend less, and underinvest. But with nominal GDP growth now running at a whopping 5% and record wage growth, inflation incentivises new capital investment, stimulating a new investment-banking cycle of financing.

There are risks to this outlook. Double-digit market rallies can lead to pullbacks, and investors need to watch for threats to Japan’s inflation and currency levels and to its appetite for reform. But what’s most important for investors to realise about Japan is how much has changed there, amid a changing world.

Guest commentaries like this one are written by authors outside the Barron’s newsroom. They reflect the perspective and opinions of the authors.

Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.

This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.

Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.

Here are three strategies useful for functional families.

Intrafamily loans

It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.

But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.

If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.

To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.

In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.

If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.

Asset gifts

Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.

The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.

Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.

However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.

These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.

But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.

Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.

The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.

Sellner doesn’t worry about his children using the funds for another purpose.

“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.

Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.

Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.

Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”

Disclaimers

A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.

Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.

Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.

Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.

Japan’s Market Boom Is Just Getting Started. 2 Big Reasons Why.

Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.

Intrafamily loans

Asset gifts

Disclaimers