To develop a sustainable export growth plan, Japan has looked to other countries for comparison, notably South Korea, which has a more developed defence sector and has signed multibillion-dollar agreements to supply equipment such as howitzers, rocket systems, and ammunition to countries like Poland.

Japan can emulate this success higher up the technology chain in areas such as missile systems and space technology, said Hirohito Ogi, a former official from Japan's Ministry of Defence. The country is also considering increasing its missile and other weapon manufacturing capabilities, which would help boost its stockpiles and could assist the United States, which has itself issued warnings about its own ammunition shortages. The coalition suggests it might resort to public arsenals operated by private companies.

In fact, the shift in Japan's defence strategy occurred in 2022, after the war in Ukraine raised concerns about a similar conflict in Asia, possibly around Taiwan. Tokyo has committed to investing 43 trillion yen over five years in military equipment such as long-range cruise missiles and military satellites, and to raising its overall defence budget to 2% of GDP by 2027, up from an informal ceiling of 1%.

Missiles and satellites are now part of a new strategy aimed at deterring rivals like China and North Korea by being able to strike military sites in these countries from land, sea, and air. Japan's defence giants are already seeing their orders swell. Mitsubishi Heavy is retooling for the production of long-range missiles and building frigates for Australia, an unprecedented export success. NEC's defence division is ramping up its workforce at a rapid pace, and even Mitsubishi Electric, once cautious, is openly talking about doubling its defence revenue by the end of the decade.

These projects are no longer secondary; they are at the heart of Tokyo’s new growth strategy. Culturally, the transformation could be even more remarkable than economically. The generation that once worried about the term ‘arms exports’ is fading, replaced by a generation that sees defence technologies as just another high-margin sector, comparable to semiconductors or robotics.

Missiles and satellites are now part of a new strategy aimed at deterring rivals like China and North Korea by being able to strike military sites in these countries from land, sea, and air. Japan's defence giants are already seeing their orders swell. Mitsubishi Heavy is retooling for the production of long-range missiles and building frigates for Australia, an unprecedented export success. NEC's defence division is ramping up its workforce at a rapid pace, and even Mitsubishi Electric, once cautious, is openly talking about doubling its defence revenue by the end of the decade. These projects are no longer secondary; they are at the heart of Tokyo’s new growth strategy. Culturally, the transformation could be even more remarkable than economically. The generation that once worried about the term ‘arms exports’ is fading, replaced by a generation that sees defence technologies as just another high-margin sector, comparable to semiconductors or robotics.

Japan's moral calculus is evolving: deterrence is no longer an uncomfortable legacy, but an insurance in an uncertain world. Thus, Takaichi has managed to combine industrial pragmatism with national ambition, and traders sense the political fuel strong enough to drive both growth and pride. Her pro-stimulus stance has given Japanese stocks the kind of momentum that only emerges when budgetary engines and political will work in concert.

The weakness of the yen against the dollar has provided the much-appreciated tailwind for exporters. A weakened yen boosts domestic earnings from global sales. The Japanese index is packed with exporters and global technology suppliers (industrial automation, semiconductor equipment, materials, electrical components). When the USD/JPY remains high, operating leverage takes care of the rest. The result: earnings that exceed expectations and resilient margins, which investors are already projecting into the 2026 capex cycles related to AI, automotive, and digitalisation.

However, the easy alpha from monetary weakness has already been exploited. Markets are still trying to decode the meaning of 'Takaichinomics,' but this is not 2012. When Shinzo Abe returned to power, the deliberate devaluation of the yen was his growth lever, a monetary cannon aimed at the deflationary bunker. This time, the situation is reversed. The yen is already stretched to the limit, with its real exchange rate hovering near the lowest levels in decades. There simply isn't room for another major collapse without risking a geopolitical backlash.

Moreover, the Bank of Japan remains the most dovish major central bank in the world.

The argument that Takaichi's rise automatically locks Japan into further monetary easing is too simplistic at the moment. Although she is politically aggressive and rhetorically conservative, the institutional pace still belongs to Ueda and a Bank of Japan (BoJ) increasingly concerned with its credibility. Inflation, rather than deflation—the long-standing scourge of Japan—is now the biggest economic issue, which cost Ishiba's LDP a huge electoral defeat in July.

This point is crucial: the Japanese rally is no longer just a 'weak yen' trade, but a structural move driven by fiscal policy and the internal transformation of businesses. However, the risk of a yen reversal is not ruled out: firmer communication from the BoJ could shift sectoral flows and test the durability of the rally.

However, it is governance that forms the true foundation of Japan's re-rating. Since 2023, the Tokyo Stock Exchange (TSE) has required companies with a PBR (Price-to-Book Ratio) of less than 1 to publish explicit improvement plans based on the cost of capital and shareholder value creation. This provides structural reasons for rising multiples, share buybacks, and dividends.

Since March 2023, listed companies have been required to demonstrate 'awareness of the cost of capital and the price of the stock,' meaning they must justify the use of their cash and publish targeted measures to improve their ROE/ROIC and reduce idle cash.

A public list tracks companies that have disclosed this information, and its format was strengthened in January 2025, highlighting those making progress and those lagging in compliance. The desired effect is clear: to make discipline—or the lack of it—visible. The systematic publication of governance reports serves as a second key lever. Companies must provide a detailed description of their board composition and responsibilities, compensation policies, and the presence of independent directors, with heightened expectations for those listed on the Prime market. The goal is to facilitate external evaluation and shareholder engagement, particularly by foreign investors, through better availability of information in English.

The TSE no longer hesitates to use a punitive transparency approach: it highlights companies that align with investor expectations, while flagging those 'non-aligned,' creating a form of social and market pressure. Reputation becomes a financial variable. Moreover, the TSE has profoundly restructured its market segments into Prime, Standard, and Growth. The Prime market imposes stricter criteria regarding board independence and specialised committees to attract and reassure large international investors. This segmentation amplifies the gap between companies fully committed to value creation and those more conservative in their approach.

Moreover, President Trump and Japanese Prime Minister Sanae Takaichi signed a significant set of economic and defense agreements on Monday, October 27, marking a turning point in US-Japan relations. This new framework merges industrial cooperation, military integration, and resource security into a unique strategic system, designed to counterbalance China’s growing influence in the Indo-Pacific.

The centerpiece is a partnership on critical minerals: the two nations will work to secure and refine rare earths, lithium, and other materials essential for semiconductors, electric vehicles, and advanced weapons. The goal is to break dependence on supply chains controlled by China by developing joint extraction, refining, and storage operations in allied territories, from Australia to Southeast Asia.

Japan has also reaffirmed its commitment to invest $550 billion in the US, funding naval infrastructure, industrial manufacturing, and clean energy projects. This is a multi-year capital pipeline aimed at strengthening the production capacities of industries that support both national economies and defense networks.

A third aspect focuses on naval and industrial integration. Japan will contribute to modernising US shipyards by bringing its expertise in engineering and manufacturing efficiency to increase construction and repair capacities. This partnership addresses real bottlenecks in US maritime logistics, which are crucial to supporting any operation in a potential Pacific conflict scenario.

Moreover, compared to their American counterparts, many Japanese stocks are still trading at a discount, while showing cleaner balance sheets. This gap, combined with the growth in buybacks and more credible governance, attracts foreign capital seeking diversification outside of US mega-caps. This creates persistent demand, which absorbs pullbacks and fuels breakouts of resistance.

Furthermore, two tailwinds have reduced the risk premium: a US–Japan trade framework that eases tariff tensions (particularly on automobiles), and a kind of US–China tariff truce that limits shocks to Asian supply chains.

However, the mechanics could stall. First, a sharp reversal of the yen, triggered by a surprise monetary policy shift or a coordinated FX action, would squeeze exporters' margins and break the momentum. Next, stickier
domestic inflation with a more pronounced wage-price loop could force the BoJ to tighten more quickly, raising real interest rates and increasing the equity risk premium. A slowdown in defense export openingscould create a gap between political narrative and the reality of order books. And budgetary exhaustion could prevent industrial policy from taking root sustainably.

Finally, any slowdown in global growth, particularly in US technological capex or Chinese import demand, would directly impact the sectors driving the index. For now, the central scenario remains one of a regime shift. The state provides fiscal firepower, companies adopt more demanding capital management, and national savings provide a domestically insulated demand against external shocks.

Japan is no longer the tired follower of the global economy: it is recalibrating its power, asserting its strategic interests, and rediscovering the taste for calculated risk.