Three Reasons to Watch Japan

Japan is undergoing one of its biggest economic and market transformations in decades. Discover the three key reasons global investors are turning their attention to Japan, and learn how Japanese ETFs provide a simple, cost-effective way to access this evolving market.

Summary – IBKR Podcasts Ep. 413

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Elizaveta Gridneva

Hello everyone, and welcome to the latest IBKR Podcast episode. Today we talk about Japan, and my guest today is Sho Shibamoto, who is a Managing Director of Business Development at Direction. 

Sho is joining us today directly from Direction’s Tokyo office. Hi, Sho. 

Sho Shibamoto

Hi, everyone, and thank you very much for having me today. My name is Sho Shibamoto, and I work at Direction. As some of you might know, Direction is a firm well-known for leverage and inverse ETF in the United States. I’m Japanese, I’m in Japan, and actually I’m at Direction’s office in Shibuya, 

Elizaveta Gridneva

That’s good. 

Sho Shibamoto

So not too far from the Shibuya Crossing, as you might know. 

Elizaveta Gridneva

Oh yes, that’s very famous. Thank you for joining us today. It’s not our first episode on Japan. I know that you spent 18 years at one of Japan’s largest asset managers, and you were heavily involved in ETF business across Japan and the United States, so we really would like to know your point of view on the market. So let’s just start. Can you point out the top three reasons to invest in Japan? 

Sho Shibamoto

Sure. Maybe first, let me introduce myself again. Before joining Direction, as you mentioned, I spent about 18 years at one of Japan’s largest asset managers, Amova Asset Management. Throughout my career, I’ve been deeply involved in ETFs across both Japan and the US. Amova also has a strong footprint in Asia, so I worked closely with the ETF market in Hong Kong and Singapore as well. Unfortunately, I won’t be talking about US leverage and inverse ETFs today, and I hope I can do that someday in the near future. But I’m very pleased to share my perspective on the Japanese ETF market and some of the trends we’re seeing in Japan today. 

First of all, I’ve spent my entire career in Japan, and honestly, I think Japan is in a very different place today than it was even five or 10 years ago. For many years, the investment case for Japan was mostly about valuation. I used to promote Japan by saying, “Hey, look, Japanese equities are undervalued,” and that there might be potential upside from export growth or economic stimulus. But today, I think the story is much more about structural change. Getting back to your question, let me explain through three key reasons, because I think three is a magical number that is always easier to remember. The three reasons are: first, strong fundamentals; second, corporate governance reform; and third, growing domestic retail participation. 

So first point, fundamentals. Japanese companies are doing well, but the bigger story is that Japan is finally emerging from decades of deflation. That may not sound very exciting for foreign investors, but it’s actually a huge change for Japanese people. Under deflation, people tend to delay spending because they think prices will be lower tomorrow. Under inflation, the mindset changes. People become more willing to spend, invest, and make decisions today rather than wait. Due to inflation, companies are raising prices, wages are increasing, and businesses are investing for growth. For Japanese people, this feels very different from the environment we’ve experienced over the last 30 years. 

Second is corporate governance reform. This is probably one of the most important developments in the Japanese equity market over the past decades. The Tokyo Stock Exchange has been actively encouraging companies to improve capital efficiency and enhance shareholder value. As a result, we’re seeing more share buybacks, higher dividend payouts, and unwinding of cross-shareholdings. In simple terms, Japanese companies are becoming more shareholder-friendly and paying greater attention to profitability, return on equity, and market valuation. I believe this is helping unlock value that has been sitting inside many Japanese companies for years. 

The third point is growing domestic retail participation. This is actually the trend that I am very excited about. Even today, more than half of Japanese household financial assets are still held in cash or bank deposits. Historically, Japanese individuals haven’t been very active investors. However, that is beginning to change, largely because of the new NISA program, which is a tax-exempt investment account. Normally, investment gains in Japan are subject to roughly 20% tax. Under NISA, those gains can be tax-free, making investment much more attractive for retail investors. Not surprisingly, people started investing. Today, roughly one quarter of the population has a NISA account. But if you look at it another way, that means three-quarters of the population still don’t. So that opportunity is enormous. Even in ETFs, there are only about two million retail investors in a country of more than 120 million people. When you put all those things together, Japan has a very large pool of household savings that is gradually moving from cash into investments. 

I believe that could become a powerful long-term structural tailwind for the market. When I think about Japan today, I don’t see it as a simple short-term trade. I see it as a market that is undergoing a structural transformation, and that’s why I believe global investors are paying much closer attention to Japan than they have in many years. 

Elizaveta Gridneva

That’s great, Sho. I can see that you’re very passionate about the subject. You mentioned there is unlocked value sitting in these Japanese companies—an enormous opportunity there. So let’s say I got inspired and I want to participate. How easy is it to access Japan? Where do I start? 

Sho Shibamoto

Yeah, great question. The simplest and most efficient way to access the Japan market is through Japanese ETFs. The reason is pretty straightforward. ETFs provide broad exposure to the market, so investors don’t need to spend time selecting individual stocks. At the same time, they’re very easy to trade. 

In fact, if you can trade Japanese equities, you can trade Japanese ETFs. For many investors, ETFs are one of the easiest and most convenient ways to get started with Japan. I believe IBKR provides access to the Japanese market. So if you’re already using IBKR, you can trade Japanese ETFs through the same platform and gain exposure to a wide range of Japanese investment themes and indices. 

Elizaveta Gridneva

Yeah, exactly. We do provide the access. I know, as you mentioned in the beginning, you spent almost a decade working with Japanese ETFs. Could you walk us through the ETF universe in Japan? What’s so special about it? 

Sho Shibamoto

Yeah, sure. Again, let me highlight three key features. I like the number three. 

First is the market size. Japan is actually the largest ETF market in the Asia-Pacific region, with approximately 800 billion US dollars in assets as of May 2026. For many years, the Japanese and Chinese ETF markets have been very close in size. However, Japan is currently slightly larger and significantly larger than other major markets in the region such as Korea and Taiwan. 

Second is the number of ETFs. Today, there are more than 400 ETFs listed on the Tokyo Stock Exchange. That said, the market is highly concentrated. Over 50% of assets track TOPIX, and about 30% track the Nikkei 225. 

I’m not sure whether you’re familiar with TOPIX or the Nikkei 225, but for those who may not be familiar with these benchmarks, TOPIX is a market-cap-weighted index that covers about 1,600 companies. The Nikkei 225 is a price-weighted index consisting of 225 leading Japanese stocks. 

The third is the investor base. One of the very unique characteristics of the Japanese ETF market is its institutional investor base. Approximately 94% of ETF assets are held by domestic institutional investors, including the Bank of Japan, while retail investors and foreign investors each account for only about 3% of total assets. This strong institutional presence contributes to efficient price discovery and helps support overall market liquidity. 

To sum up, Japan is the largest ETF market in Asia, with assets heavily concentrated in domestic equity ETFs and supported by institutional investors. In other words, foreign investors can access the Japanese market in a similar way to Japanese financial institutions through ETFs. Again, foreign investors can access Japanese ETFs through brokers like IBKR. 

Elizaveta Gridneva

Thanks for mentioning that. All right. 

If we’re talking about very specific traits of Japanese ETFs, what would that be? 

Sho Shibamoto

So let me explain three ways to access Japanese ETFs. First is the traditional on-exchange trading. This is probably the method that most investors are familiar with. By the way, when you look at ETF liquidity, they often focus on trading volume. But in reality, liquidity is much more than just what you see on the screen. A key reason for that is the presence of market makers. Market makers provide liquidity based on the liquidity of the underlying securities. So in many cases, the actual liquidity available can be significantly greater than an ETF’s displayed trading volume. 

The Tokyo Stock Exchange has also been working hard to improve on-screen liquidity through its market-making program. Today, 13 global market makers participate in the program, helping to maintain tight bid-ask spreads and efficient execution for investors. 

Another way to trade Japanese ETFs is OTC trading, or over-the-counter trading. This is often used for larger transactions. Depending on the size of the order and market conditions, OTC trades can provide better execution. However, investors should keep in mind that OTC transactions involve counterparty risk because the trade is executed directly with the dealer. 

The third way to trade Japanese ETFs is through an RFQ platform called Connector. Connector is an RFQ platform operated by the Tokyo Stock Exchange, and it is connected to systems such as Bloomberg EMSX and Tradeweb. Through this platform, investors can receive the best quote from multiple market makers. What’s interesting is that while the pricing comes from the RFQ process, the trade itself is executed on the exchange and cleared through the clearing house. In other words, investors can benefit from competitive RFQ pricing while avoiding the counterparty risk that comes with OTC trading. 

Getting back to your question about what are the interesting themes in Japan, I would say that while most assets are concentrated in broad indices, namely TOPIX and the Nikkei 225, there are several interesting segments. 

Let me give some examples. One is active Japanese equity ETFs, which leverage local managers’ expertise. Another interesting topic might be JGB ETFs, which are becoming more relevant in a rising-rate environment. Third, Japan REIT ETFs. Japan has the second-largest REIT market globally. Although REIT performance has been weak recently, this is mainly due to interest rate uncertainty rather than property fundamentals. 

Maybe another interesting topic might be the category of JPY-hedged ETFs. So what is it? Basically, this invests in foreign assets such as US equities or Treasuries, but hedges the currency exposure into Japanese yen. In simple terms, this creates a long yen, short US dollar position. These products have been especially popular among Korean investors and may be attractive for those who expect a stronger yen in a rising interest rate environment. 

Elizaveta Gridneva

That’s great. Thanks. 

Sho Shibamoto

Sorry I talk…

Elizaveta Gridneva

No, that’s great because you really brought up a few things that we need to know if we’re interested in the Japan market. Actually, following up on that, I noticed there is some buzz on popular offshore ETFs, like those traded on US exchanges, those that allow global investors to easily track Japanese stocks. 

So let’s compare Japan-listed ETFs versus those offshore ETFs. What should investors be aware of? 

Sho Shibamoto

Sure. So I guess your question is why select Japan ETFs over non-Japan ETFs when investing in Japanese equities. 

Elizaveta Gridneva

Great. 

Sho Shibamoto

Let me explain the advantages of Japan-listed Japanese equity ETFs. Again, I will raise three points. I like three. 

First is management fees. Fees are very low due to strong and tough competition in the Japanese ETF market. In fact, many TOPIX ETFs have expense ratios of about five basis points, which is extremely cost-competitive compared to global standards. 

Second is the bid-ask spread. Spreads are typically very tight because both the Japan-listed ETF and its underlying Japanese equities are traded in the same time zone. This makes it much easier for market makers to hedge their positions in real time, which translates into better pricing and more efficient execution for investors. Third is tax efficiency. When investing in Japanese equities through non-Japan-listed ETFs, investors are generally subject to two layers of taxation on dividends. The first layer occurs between the Japanese equities and the non-Japan-listed ETF. The second layer occurs between the non-Japan-listed ETF and the investor. In contrast, with Japan-listed ETFs, there is no taxation between the Japanese equities and the Japan-listed ETF itself. Investors are taxed only between the Japan-listed ETF and the investor. 

Over time, this difference in tax treatment can have a meaningful impact on investment returns, especially for long-term investors. 

Elizaveta Gridneva

Yeah, that’s understandable. It really looks like three is a magical number, so we really appreciate the insights you provided today. Traditionally, as I do, I would like to give you the opportunity for a closing of this episode. If you would like our listeners to leave with some takeaway, what would that be? 

Sho Shibamoto

Sure. Again, I think, as a conclusion, Japan is a market that is starting to move, and Japanese ETFs offer a simple and efficient way to capture that shift. As someone who was born and raised in Japan, it has been a pleasure sharing my thoughts with you today, and I hope to see more investment flow into Japan from overseas. 

Arigato and sayonara. 

Elizaveta Gridneva

Thank you, Sho, for joining us today. It’s been a pleasure. Thank you, everyone, for listening, and subscribe to the IBKR Podcast. Thank you.