As with any investment, your capital is at risk.
I first visited Japan as a Baillie Gifford investment trainee in 2006, the year Nintendo launched the Wii. Back then, research trips still meant printed annual reports, annotated notes, and a reliance on patchy hotel-room internet connections. Much has since changed. Information flow is faster, meetings are data-rich and companies appear more willing to engage with questions about capital allocation and long-term strategic change.
Yet the essential appeal of the market remains the same. Japan still rewards investors who are prepared to look twice. Although the prevailing narrative and surface impression can be misleading – a mature economy, ageing demographics, cautious companies and modest headline growth – beneath that surface are businesses with dominant niches, deep technical expertise, improving capital discipline and management teams that are increasingly willing to think differently. That combination is rare. Japan is still widely perceived through the lens of its past, but it is increasingly being reshaped by companies building a very different future.
That opportunity lies at the heart of Japan Core Growth, a new strategy that I will jointly manage with Matt Brett. It aims to give clients access to Baillie Gifford’s time-tested Japanese stock-picking capability – and exposure to Japan’s leading investment opportunities – through a more deliberately risk-controlled portfolio. The aim is not to change how we find exceptional businesses, but to improve how we express and assemble those ideas for clients, so that returns are driven more clearly by the companies we choose to own and less by unintended sector, factor or macro noise. This represents an evolution from the previous approach to moderating volatility through income generation. That framework served a purpose, but over time it became less suited to the opportunities available and, in some respects, unnecessarily constraining.
The advantage of looking twice
While Japan Core Growth is a new strategy, it builds on a long-established craft. Baillie Gifford has been applying bottom-up research to dedicated Japanese portfolios since 1981. Like any craft, the tools evolve, but the core discipline has not: finding exceptional businesses early, understanding them thoroughly and backing them before their strengths are fully reflected in share prices.
That matters in Japan because change and opportunity are not always announced loudly. They can hide behind understated headquarters, conservative public statements or balance sheets that have changed more slowly than the businesses themselves. Our job is to look past the surface presentation and understand what is really changing: the economics of the business, the calibre of management, the durability of its competitive advantage and the scale of the opportunity ahead.
This is where our Japan Equity Team’s depth of resources and continuity of experience matter. The team today comprises nine investors with many years of combined experience. Each year, it undertakes hundreds of company meetings and produces a substantial body of original research. Those insights are tested and refined through debate, peer review and regular discussion of investment ideas.
In a market where insight is often built through persistence, repeated engagement and institutional memory, that platform can be a meaningful advantage. Japan Core Growth draws directly on it, allowing our stock-picking capability to be expressed more cleanly, with greater discipline around deliberate risk-taking.
A bento box offers a simple analogy. Its strength lies not in relying on one ingredient, but in selecting each component carefully so that the overall meal is balanced. Japan Core Growth applies the same idea to the Japanese market, using our research to find exceptional companies across sectors, while avoiding excessive dependence on any one part of the index. Within financials, for example, we do not need to own the megabanks simply because they dominate the index. We can instead focus on Chiba Bank, a best-in-class regional bank with strong local market share, improving management discipline, operational advantages through its ‘Tsubasa’ digital alliance and scope for higher returns as interest rates normalise.
The same principle applies in autos within the Consumer Discretionary sector. Japan’s large original equipment manufacturers (OEMs) may remain challenged by the transition away from internal combustion engines, but that does not mean the entire sector is devoid of opportunity. Niterra offers a more attractive expression of the opportunity: a dominant and consolidating spark plug and sensor franchise, supported by aftermarket pricing power and emerging growth areas such as silicon nitride bearings for electric vehicles and electrostatic chucks for semiconductor production equipment. The aim is not to make a blanket call on financials or autos, but to apply the same stock-picking discipline within each sector and own the companies we believe are best placed to create long-term value.
This idea is embedded in the portfolio’s risk framework. In addition to these guidelines and internal risk tools, we work with a dedicated risk analyst who has a separate reporting line to the investment team. That independence allows for rigorous, objective challenge, including on risks that quantitative measures alone may not fully capture.
A market beginning to move
Japan’s opportunity set is changing in ways that are easy to underestimate. The country is not suddenly abandoning its past, but some of the forces that defined it – deflation, excess cash, conservative balance sheets and underused industrial strengths – are beginning to work differently.
That creates opportunity, but not uniformly. A changing Japan is unlikely to lift all companies equally.
The end of Japan’s three-decade fight with deflation offers one such example. A more normal environment, in which benign inflation once again exerts upward pressure on prices and wages, creates a fruitful backdrop for corporate growth. But it will not help all companies equally. Those with weak brands, limited differentiation or poor cost control may find inflation a squeeze rather than a benefit. Businesses with pricing power, strong market positions and disciplined management should be better placed to protect margins, grow earnings and create value.
Corporate governance reform offers another potential catalyst. However, this is unlikely to be a one-off event, but an unfolding process. Some companies may respond only reluctantly, returning capital without improving the underlying quality of the business. Others may use the pressure more productively: simplifying portfolios, selling non-core assets, unwinding cross-shareholdings, improving capital allocation and sharpening strategic focus. The opportunity is not simply to own companies exposed to reform, but to identify those where reform can translate into better long-term returns.
Finally, Japan, like every other country, must respond to the technological step change we are experiencing. This could play directly into some of the country’s enduring advantages. If the last era of growth investing was dominated by software platforms and consumer internet models, the next may place greater value on the physical world: robotics that address labour shortages, automation that improves productivity, advanced materials that enable electrification, and precision engineering that sits deep inside global supply chains. These are not fashionable slogans in Japan. They are areas of accumulated industrial strength. But even here, selectivity matters. Not every industrial company will benefit from automation. Not every manufacturer will turn technical expertise into profitable growth. Some businesses may be trapped in legacy end markets, exposed to commoditisation or unable to earn attractive returns on the capital they deploy. The opportunity lies in finding companies with the technology, market position and management quality to convert Japan’s industrial strengths into durable earnings growth.
Taken together, these changes make Japan more interesting, but also more demanding. The market is improving, but this is unlikely to create a rising-tide effect. Inflation, governance reform and technological change should create a wider dispersion of outcomes between companies. That is where Japan Core Growth will be well placed. It offers a way to access Japan’s changing opportunity set through a portfolio built around company selection, rather than broad exposure to market characteristics such as size, valuation or sector.
A season of renewal
Ōdake, The Old Man Who Caused Withered Trees to Flower, illustration from A. B. Mitford, Tales of Old Japan, vol. 1, 1871. Public domain. Source: Digitale Sammlungen.
Japan Core Growth is built for a changing Japan. The old Japanese folktale of Hanasaka Jiisan, in which an old man’s care and patience help withered trees blossom again, offers a quiet echo of this moment. Its lesson is not one of instant transformation, but of renewal drawn from what already exists. Japan’s opportunity set is not being conjured from nothing. It is emerging from long-established corporate strengths, improved governance, a more normal inflationary environment and renewed strategic focus.
Our task is to find the companies best placed to benefit from that renewal, while avoiding those for which the same changes may prove more challenging. The refined risk framework gives us a more disciplined way to express those stock-selection insights – not by second-guessing broad market movements, but by applying our time-tested approach across sectors to identify the strongest businesses in each part of the market. In that sense, Japan Core Growth retains the roots of Baillie Gifford’s Japanese equity approach, while giving it a sharper framework for the conditions ahead: exceptional businesses, deliberate risk-taking and a clearer translation of investment insight into value for clients.
Risk factors
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in May 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Potential for Profit and Loss
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
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The images used in this communication are for illustrative purposes only.
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