- Japan set for snap election on 8 February 2026
- Japanese yen volatility has been focused on its relationship with the US dollar rather than sterling
- AJ Bell does not hold Japanese government bonds to avoid tail risks associated with normalisation of interest rate policy
- Japanese equities have long-term attraction owing to valuations and corporate reforms
- AJ Bell’s Strategic Asset Allocation 2026 shows positioning on Japan across its funds and MPS
James Flintoft, head of investment solutions at AJ Bell, comments:
“As the Japanese election approaches, the conversation around the country’s markets has intensified. But for sterling‑based investors like us, the picture is more nuanced than global headlines imply.
“A great deal of the recent yen volatility has been concentrated in the US dollar/Japanese yen currency pair, where intervention worries and shifting US rate expectations have pushed any movements to the forefront of market attention. By contrast, the sterling/yen exchange rate has been far more stable, meaning the currency impact experienced by UK‑domiciled portfolios has been markedly less dramatic.
“For our investors, that distinction matters. It means the recent noise in FX markets has had less direct translation risk on Japanese equity holdings than one might assume from looking solely at the dollar crosses.
“From a policy standpoint, Japan is juggling two powerful forces: expansionary fiscal plans tied to the snap election, which raise legitimate questions around long‑term debt sustainability, and a central bank cautiously undergoing policy normalisation, with markets increasingly expecting a slow departure from ultra‑loose monetary policy.
“These opposing pressures have contributed to heightened volatility in Japanese government bonds. Japan is the second largest bond issuer in many global government indices, however at AJ Bell we do not hold any Japanese government bond exposure, and that is deliberate. In our view, the asymmetric risk profile – where modest yield compensation sits against the possibility of sharp repricing as policy shifts – does not offer an attractive balance for multi‑asset portfolios. We see that space as carrying tail‑risk potential, not a dependable source of defensive characteristics.
“For equities, the story is different. We continue to see Japan as a valuable component of global diversification. Corporate reforms, a push toward higher governance standards, and shareholder‑friendly practices have strengthened the long‑term investment case.
Source: AJ Bell Investments, Strategic Asset Allocation 2026
“AJ Bell’s funds gain access to Japan primarily via the Amundi Prime Japan ETF, which has an OCF of 0.05%.
“A weaker yen, if it persists, tends to support Japan’s exporters by enhancing their overseas earnings. A stronger yen can dampen that translation boost but may equally signal greater domestic stability – often a positive backdrop for more domestically‑oriented businesses. These dynamics reinforce why our exposure is equity‑focused.
“In short, while the election and the path toward monetary normalisation may keep markets lively, we believe Japanese equities still offer meaningful long‑term opportunities. For sterling investors, the important point is that the currency effects are less disruptive than the narrative suggests, and our portfolio construction – avoiding Japanese government bonds and maintaining diversified equity exposure – places us in a position to navigate this period without taking on unwanted risk.”