The number of babies born to Japanese parents fell below 700,000 in 2024 for the first time since records began at the end of the 19th century. The number had high shock value in itself, but for would-be investors the statistic came with two bigger surprises.

The first was how fast the decline in Japanese births is now accelerating compared with median projections.

Government demographers had not forecast Japan’s annual supply of newborns to break below the 700,000 line until at least 2039.

The second, more counterintuitive, surprise was when the industry’s biggest trade association reported that Japan’s toy market surged almost 8 per cent in 2024 to hit record sales of $7.4bn. There may be a chronic shortage of children, but grown-ups are in plentiful supply.

Adults, not only in Japan but around the world, are increasingly the most reliable — and deep pocketed — buyers of the trading cards, character merchandise and other collectibles that Japan has been perfecting for decades.

These two revelations underline how important it is to dig beneath the headlines if investors are to profit from what could be a compelling picture of Japan at a historic moment of transformation.

Alongside those rapidly falling birth numbers, the number of deaths in Japan rose sharply in 2024, so that the overall population of Japanese living in Japan declined by a record 909,000. Japan’s population is ageing and shrinking and the country is running short of the domestic labour force it needs to maintain the economy in its current form.

How companies engineer survival against this backdrop, say analysts, is now the Japanese investment story. Automation, the pragmatic use of AI in industry, consolidation, buyouts, and both domestic and overseas M&A will be among the dominant themes for Japanese stocks in coming years.

At the same time, the Japanese stock market is in a prime position to benefit from attempts by US investors to diversify their portfolios.

Naomi Fink, chief global strategist at Amova, an asset manager, says that even after Topix, the broad benchmark that tracks the whole Tokyo market, reached all-time highs in September, it remained some way off looking expensive. That is particularly so when compared with the valuations commanded by US stocks.

“The fundamental viewpoint is that the trend is likely to be up — inflation sticks, cash being put to work that wasn’t before, there is a labour supply shortage. In the long term, Japan has a growth trajectory,” says Fink.

She notes too that many Japanese companies have been preparing for domestic population decline by focusing the majority of their businesses overseas in search of both production capacity closer to customers, and the customers themselves. 

Fink says that global portfolio managers looking to diversify risk away from a US market in which most are heavily overweight will find the Japanese market offers a rare opportunity for uncorrelated returns.

Japan has huge quantities of corporate cash waiting on the sidelines and the local population, who previously avoided their stock market, are beginning to invest. Japanese institutions, meanwhile, have made good money in the US and it will make sense for many to lock in profits and park them in yen assets. 

“There are lots of factors that limit your downside in Japan. Global investors are driven by loss aversion — losing feels worse than winning feels good — and Japan is a good place to limit your downside,” says Fink.

The sense that this time may be different has been underscored by the Topix’s recent succession of record highs. Its long, sustained rally, notes Bruce Kirk, chief equity strategist at Goldman Sachs, has been driven by sustained buying by foreign funds — which would probably, in the past, have taken profits far sooner, killing the rally. Investors now want to know what needs to happen for the Topix to command a higher price-to-earnings multiple.

“The holy grail of investing in Japan is a stable yen and a prolonged rally, of the sort we have now” says Kirk. “But looking ahead, consolidation has the potential to really push returns on equity higher, and to trigger a more serious re-rating of the Japanese equity market.”

The biggest enthusiasts see the Tokyo stock market — long dismissed by global fund managers, and consequently forming an ever smaller proportion of global stock indices — as a “must buy”. Changes, reforms and wholesale shifts in thinking that have been resisted for years are now being forced on companies and the government by hard demographic reality, rising interest rates, and the return of inflation after many years.

Shrikant Kale, a quantitative strategist at Jefferies, says that months of asking investors around the world for their views on Japan had found institutional money is increasingly interested in the way that many Japanese companies appear to be shifting to become more shareholder friendly. Successive years of record share buybacks and increasing dividends are raising the total yield on Japanese stocks to levels close to those of European counterparts.

The fundamental viewpoint is that the trend is likely to be up. Japan has a growth trajectory

And when investors revisit the Japanese market — as they do with increasing frequency — the big question they confront, says Martin Schulz, chief policy economist at Fujitsu, is where the value will come from as reality bites. Companies that have managed to remain afloat when monetary conditions were ultra-loose are being squeezed, he says, while the ones with money and technology will survive and will buy out others.

“Some will disappear, some will become much better. We see really that the market is shifting in two directions and investors have to look where the value is. But in Japan, in every sector there is something to find,” says Schulz.