Japan Is the Most Exciting Market in the World
Warren Buffett’s visit in the spring highlighted the value, and stocks are up 20% since March
4 min
There are conflicting stories to tell about investing in Japan at the moment, and annoyingly both appear to be correct.
The first is that the stock market is on fire, producing the best returns of any major developed country since the start of last year as foreigners wake up to the new shareholder-friendly approach of government, stock exchange and corporate boards.
Billionaire Warren Buffett’s visit and positive comments in the spring highlighted the value of venturing to the country, and stocks are up more than 20% since late March as foreign cash poured in.
The second is that all the work has been done by the collapsing yen, and in dollar terms Japanese stocks have performed almost exactly like the S&P 500.
I’m convinced by both stories, which is tricky. Under the first, I’ve long thought that Japan is shifting more toward market capitalism (even as the U.S. appears to be moving away from it).
The reform process that began with the third of the “three arrows” of Abenomics a decade ago is finally bearing fruit, as directors increasingly focus on profitability, run down cash piles and put investors first. There is still a long way to go (the barbarians remain mostly outside the gate) but buybacks, hostile takeovers and pushy investors getting their way are no longer impossible.
It isn’t just that the government, takeover panel and stock exchange are trying to create a friendly environment for shareholders. As Peter Tasker, co-founder and chief strategist of Arcus Investment, points out, they are pushing at an open door.
Companies overall have net cash, freeing them from the obligations to banks that made them focus on their lenders rather than their shareholders.
Incipient inflation—still supported by negative interest rates at the Bank of Japan—makes holding cash less attractive. The ageing population has created a permanent labor shortage. This makes layoffs politically easier since jettisoned workers can find new work quickly. And the desire of the U.S. and Europe to reduce dependence on China makes Japan’s manufacturing base and Pacific location attractive.
“I see a confluence of the incentives for investors put in place by the authorities and the position of Japan geopolitically as being very important, particularly as the yen is so cheap,” Tasker says.
The very cheapness of the yen is the problem, though. Since the start of last year, gains for Japanese stocks over and above the S&P have come only when the yen weakens—which it has done in high style. The currency is approaching 150 yen to the dollar again, worrying policy makers who intervened last year for the first time since 2011 to protect the level. This week, Finance Minister Shunichi Suzuki warned of possible intervention although insisted that it is sharp moves in the yen, not the currency’s level, that the government cares about.
It is natural that Japanese stocks should gain as the currency weakens, since the biggest are global companies such as Toyota Motor and Sony Group that earn much of their revenue overseas. The problem is that when the yen’s moves are stripped out, the Japanese market has matched the U.S. almost perfectly.
This makes it doubly hard to be bullish on Japan in the short run. If the currency strengthens, stocks should fall. And the currency is likely to strengthen if and when the central bank pulls back from super-easy policies in the face of rising inflation (core consumer prices are rising at the highest rate since 1992, before deflation set in).
Worse, it’s really hard to see why Japanese stocks have performed like the S&P, given the huge differences between the two markets. Investors shouldn’t invest in things they don’t understand, and the tight link between the performance of the broadly diversified Japanese market and the tech-dominated, top-heavy S&P is a puzzle.
Maybe it is driven by index and futures traders throwing billions around while ignoring individual stocks, thus creating great opportunities for stock pickers. But this is impossible to prove, and the alternative theory is blind luck, not a great basis for an investment.
One twist to my concerns is that perhaps it’s good that Japan has only matched the U.S. for the past couple of years, because it means many investors haven’t yet bought into the idea that Japan is fixing its stock market. For those of us who think there is a long-lasting change under way in Japan, that means there is still plenty of buyers out there who will eventually join in.
That shows up in stock valuations. Tasker calculates that almost half the benchmark Topix index trades at less than book value, while the index has a forward price/earnings ratio of 14 times, against 18 for the S&P.
True, it’s no longer the screaming bargain it was at below 11 times before Abenomics began, or around 12 earlier this year when Buffett visited Tokyo and said he might increase already-hefty holdings in the country’s trading houses (which have all outperformed the broader market since). But it is at least much cheaper than the U.S.
Japan has plenty of long-run economic challenges, not least a huge government debt load and among the world’s worst demographics, as well as a reliance on central-bank financing. The puzzling link between its stock market and the S&P gives me pause for thought, too.
But for the medium to long run, so long as macroeconomic disaster is averted, the shift toward market capitalism ought to lead to better-run companies that are worth more.
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Technology and semiconductor shares fell sharply as investors questioned the debt financing the AI infrastructure boom and confronted higher rates and Chinese competition.
Technology and semiconductor shares fell sharply as investors questioned the debt financing the AI infrastructure boom and confronted higher rates and Chinese competition.
4 minA sharp technology sell-off has exposed a new anxiety on global markets: whether the enormous borrowing behind the artificial-intelligence infrastructure boom can generate sufficient returns as interest rates rise and Chinese competition intensifies.
The artificial-intelligence investment boom has powered technology shares, semiconductor manufacturers and data-centre operators to extraordinary heights. Last week, investors were given a reminder that much of this expansion is being built with borrowed money.
The technology-heavy Nasdaq Composite fell 4.5 per cent over the week ended October 16, its weakest performance since late June. Semiconductor shares suffered an even deeper correction, with the Philadelphia Semiconductor Index losing about 11.4 per cent.
The selling spread quickly through global markets. Micron Technology fell 14.6 per cent over the week, while South Korea’s Samsung Electronics and SK Hynix dropped approximately 18 per cent and 24 per cent respectively.
This was more than a routine bout of profit-taking. Investors were reassessing three interconnected risks: higher interest rates, the rapidly expanding debt burden attached to AI infrastructure and the prospect of stronger competition from Chinese memory-chip manufacturers.
The debt behind the AI build-out
Artificial intelligence requires a physical infrastructure network of enormous scale. Data centres must be built, advanced processors purchased, power supplies secured and cooling systems installed before customers begin generating meaningful revenue from them.
Technology companies are increasingly supplementing their own cash with corporate bonds, syndicated loans, equipment leases, private credit and project-level financing.
JPMorgan describes the emerging funding model as a combination of conventional corporate borrowing and project finance tied to individual data-centre assets. In Australia, the Reserve Bank estimates that syndicated loans accounted for approximately three-quarters of data-centre financing during 2025 and 2026 to date.
The numbers are becoming large enough to affect broader credit markets. The Federal Reserve Bank of Dallas has cited Wall Street estimates suggesting AI-related investment-grade bond issuance could approach US$300 billion in 2026 alone.
That borrowing is not automatically problematic. Debt can be an efficient way to finance long-lived infrastructure when future revenue is sufficiently predictable. The concern is that AI technology, customer demand and computing economics are changing much faster than the repayment schedules attached to the assets.
A data centre financed today may carry debt for years. Investors must therefore make assumptions about future utilisation rates, electricity prices, chip performance, customer concentration and the amount businesses will ultimately pay for AI computing.
When interest rates rise, those assumptions become less forgiving.
Inflation changes the calculation
September’s US inflation data intensified the pressure. Consumer prices increased 3.7 per cent over the year, ahead of market expectations and up from 3.4 per cent in August.
The hotter reading reduced confidence that interest rates would fall quickly and pushed bond yields higher. That matters particularly for companies whose valuations depend on profits expected well into the future, as well as highly leveraged infrastructure operators that may need to refinance.
CoreWeave has emerged as a closely watched test case. The specialist cloud-computing company has accumulated substantial debt and lease obligations to build AI capacity, while relying on a concentrated group of large technology customers.
Its shares fell sharply during the sell-off, while the cost of insuring its debt against default climbed. CoreWeave has argued that its contracted backlog more than covers its obligations and that financial markets do not always understand its business model. Nevertheless, its securities have become a proxy for investor confidence in debt-funded AI infrastructure.
Oracle, another major investor in AI computing capacity, fell 8.8 per cent in Friday trading, while CoreWeave dropped 15.5 per cent.
The question is shifting from how much AI infrastructure can be built to how profitably it can be operated.
China adds another source of pressure
Interest rates were not the only catalyst. Reports of advances by Chinese memory-chip producer ChangXin Memory Technologies raised concerns that lower-cost Chinese products could increase competition across the global semiconductor industry.
Memory chips are essential to AI systems, but the industry is historically cyclical. Periods of tight supply and high pricing can encourage rapid investment, eventually producing oversupply and falling margins.
The prospect of a well-funded Chinese competitor expanding its technological capabilities unsettled investors in Samsung, SK Hynix and Micron. It also demonstrated that AI-related demand does not insulate chipmakers from conventional competitive pressures.
That combination—slower rate cuts, more expensive financing and potentially cheaper supply—challenged the assumption that every company exposed to AI would enjoy continually expanding margins.
A reset rather than the end of the boom
The sell-off does not establish that the AI boom is ending. Demand for computing power remains strong, the largest technology companies continue to generate formidable cash flows and many infrastructure projects are backed by long-term customer contracts.
What has changed is the market’s willingness to overlook the price and financing structure of that growth.
The most resilient companies are likely to be those able to fund investment from operating cash flow, secure long-duration customers and demonstrate that new capacity will earn returns comfortably above its financing costs.
More speculative operators may face greater scrutiny, particularly where debt is expensive, customers are concentrated or expected revenue depends on demand that has not yet materialised.
For Australian investors, the lesson extends beyond US technology shares. Local data-centre operators, infrastructure funds, electricity suppliers and property groups are increasingly exposed to the same investment cycle.
Artificial intelligence may remain one of the defining growth themes of the decade. But last week’s correction showed that enthusiasm for the technology does not eliminate financial discipline.
The next stage of the AI boom will be judged not only by computing power, model performance or demand for chips, but by something more traditional: whether the assets being financed can generate enough cash to repay the money borrowed to build them.
Fact box
Nasdaq Composite: Down 4.5 per cent for the week ended October 16, 2026
Philadelphia Semiconductor Index: Down approximately 11.4 per cent
Micron Technology: Down approximately 14.6 per cent
Samsung Electronics: Down approximately 18 per cent
SK Hynix: Down approximately 24 per cent
US September inflation: 3.7 per cent annually
Estimated 2026 AI-related investment-grade issuance: Approximately US$300 billion
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