Japanese equities have delivered a stellar 19% gain on the Topix index in the first half of 2026, but the rally is dangerously lopsided, according to asset managers. A basket of just 67 companies linked to artificial intelligence has contributed 14 percentage points of that return, leaving the broader market struggling to keep pace.
Among the standout performers are chipmaker Kioxia, which floated at ¥1,455 in December 2024 and hit ¥112,700 by June, and tech conglomerate Softbank. Even unlikely names such as food-seasonings firm Ajinomoto and toilet manufacturer Toto have been swept up, as their core businesses supply materials critical to the chip supply chain.
“The result has been an unusually narrow, yet powerful market,” note Alex Bowles and Brett Moshal of the Japan equity team at asset manager Orbis. By the end of June, only a third of Japanese stocks had beaten the Topix benchmark, creating a headwind for investors underexposed to AI.
The weak yen remains a major drag for foreign investors. Sterling now buys ¥218, compared with around ¥150 two years ago, and Japan has become one of the cheapest developed-market countries to live in when measured by purchasing power parity. Deutsche Bank’s Jim Reid notes that Japan’s price level now stands at 60 on a US=100 basis, down from 125 in 2012. Despite widespread expectations of a reversal, the yen continues to slide.
For UK investors, the concentrated nature of the rally raises questions about diversification. A sharp reversal in AI sentiment could hit Japanese equities hard, while the currency risk remains unhedged for many. Analysts point to contrarian opportunities such as Nintendo, whose shares have halved on fears that AI threatens its gaming advantage and that a memory crunch could hurt hardware sales. Orbis argues that such fears are overdone given the strength of Nintendo’s intellectual property.
The FTSE 100 has limited direct exposure to Japanese AI stocks, but UK-based investors with global portfolios should note the risks of overconcentration. The Bank of England’s monetary policy stance and the yen’s trajectory will continue to influence returns for UK households holding Japanese assets through funds or ETFs.