RBC Wealth Management analysts maintain a positive outlook on the Japanese equity market. They anticipate a Japan-US trade deal, potentially after the upper house elections on 20 July.

However, they express caution as Japan’s equity market appears to have already accounted for tariff reductions, with the auto sector reflecting overly optimistic price activities. A steady 2% inflation target seems achievable according to their assessment.

Economic Factors Supporting Equity Markets

Additional factors supporting this view include increased investment through friendshoring and onshoring, enhanced return-on-equity and shareholder dividends, and consistent domestic demand. This demand is bolstered by high savings, wage increases, and a strong influx of retail investments.

Inbound tourism and strong domestic retail investments via the updated Nippon Individual Savings Account scheme also contribute positively. These combined elements are seen as fostering a robust economic environment for Japan.

What we’re seeing from RBC is a measured optimism regarding Japan’s near-term equity prospects. The core of their view hinges on a prospective agreement between Japan and the United States, likely to follow Japan’s upper house election in late July. That timing matters. It suggests the policy route could clear up shortly afterwards, laying the groundwork for trade adjustments.

Monitoring Economic Indicators

But markets do not wait patiently. The pricing in of reduced tariffs, particularly in the auto sector, seems to have happened ahead of confirmation. The sector’s recent run-up assumes the deal arrives mostly as speculated, with few surprises. That’s where some of the caution creeps in—when expectations run ahead of reality, retracement pressure mounts when actual outcomes land. The analysts imply there is little room left for error in sector valuations right now.

Inflation, they say, looks stable. A 2% figure doesn’t raise alarms. It provides a predictable environment, which matters when assessing long positions in a market historically plagued by deflationary concerns. A framework of rising wages and high household savings helps keep internal consumption buoyant. This is unlike many developed markets that lean heavily on business investment or exports for most of their activity.

Friendshoring and onshoring trend shifts support industrial capital spending within Japan. These shifts aren’t simply noise—they’re structural reallocations of manufacturing and supply chains, spurred by lessons learned during the pandemic. With geopolitical risk still elevated in several regions, investors appear more willing to reward jurisdictions seen as stable and economically reliable. Companies returning value to shareholders through better dividend policies and more mindful balance sheet uses only add to this credibility.

Tourism—particularly inbound—shouldn’t be dismissed. With travel normalising and consumer appetite persisting, that revival feeds directly into Japan’s service and retail sectors. The updated Nippon Individual Savings Account also expands the domestic investor base. We’re now watching regular citizens allocate more of their wealth into the markets, an encouraging sign when evaluating internal appetite for risk assets.

So in the weeks ahead, speed and sequencing of legislative progress on trade deserve careful watching. Any verbal commitments followed by credible policymaking would justify current positioning in exporter-heavy names. If that progress stutters, recalibration will likely follow. Investors should study inflation prints, retail spend data and transport activity. We’ve found that these metrics offer early signals of real economic traction beneath headline optimism.

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