The UK stock market has long been seen as a good place for income investing, with firms offering high dividend yields.
But for investors looking to diversify their assets in one of the world’s leading equity markets for a good level of income and growth, Japan could be the place to look.
While Japan might not currently be on income investors’ radars, Schroder Japan Trust targets both income and growth.
The trust has provided a net asset value per share total return of 28.1 per cent over the year to 3 November 2025, according to AIC figures, combined with an enhanced dividend policy which pays out 4 per cent of the average net asset value (NAV) each financial year.
Masaki Taketsume, portfolio manager of Schroder Japan Trust, said: ‘There are many reasons to believe that we may be entering a period of sustained outperformance from the Japanese stock market.
‘We have seen renewed appetite for Japanese equity from global investors and this demand should continue to grow as the positive domestic story becomes better understood.’
The recent election Japan’s first female Prime Minister Sanae Takaichi has further ignited interest in investing in Japanese shares, thanks to her strong pro-market views.
While Japan might not currently be on income investors’ radars, Schroder Japan Trust targets both income and growth
Attitudes are changing
Japan’s rising status as a dividend powerhouse stems from shifting corporate culture.
In 2014, Japan began extensive corporate governance reform as it looked to turn the tide of economic stagnation. Headed by then Prime Minister Shinzo Abe, this included measures to promote board independence, improve dialogue with shareholders and reward investors.
Reforms have continued, ranging from a focus on greater transparency to changes to Tokyo Stock Exchange listings. The election of Takaichi is seen as supportive of stock market-friendly reforms continuing, with the new Prime Minister pushing for expansionary fiscal and monetary policy.
As a result of the reforms that have already taken place, the percentage of Japanese earnings paid out as dividends on average – known as the dividend payout ratio – has increased to 36 per cent.
This is ahead of the 34 per cent seen in the S&P 500 and comes as the Japanese stock market has also posted good growth in recent years.
Taketsume said: ‘We are continuing to see record levels of dividend payments and share buybacks, but the story doesn’t end there.
‘Improved corporate governance standards have also fuelled M&A, as companies use their cash to refocus on their most profitable areas. This helps to create more efficient businesses and ultimately stronger shareholder returns.’
Schroders says the Japan Trust is poised to benefit from cultural and structural changes
Schroders says the Japan Trust is poised to benefit from cultural and structural changes, with a focus on domestically oriented small and mid-cap firms that are less vulnerable to global uncertainty and are actively reforming. Holdings are likely to benefit from the steps they are taking over the long term, regardless of global macro developments.
Further support for shareholders comes from share buybacks. Japanese firms have been accelerating their scale and volume. Buybacks in 2025 are currently tracking just behind the pace of 2024’s buybacks, which reached a record ¥20trillion, some £90billion.
The surge comes as firms look to return more money to shareholders and change the way they manage their balance sheets.
At the same time, the Japanese stock market remains reasonably valued in comparison to the US, particularly when it comes to small and mid-cap firms. This means firms buying back shares can make the most of growth being missed by the market.
Sources: QUICK, SMBC NIKKO, as at 31 August 2025. Note: Universe is TOPIX constituents
Japan is seeing growth
The Japanese stock market is experiencing encouraging growth, with the Nikkei 225 index up 34 per cent over the year to 4 November 2025.
Over the long term, it has benefitted from increasing earnings and an improvement in corporate fundamentals.
The strong returns come despite a significant decline earlier this year, due to US President Donald Trump’s tariff announcements. Japanese stocks rallied when the US president announced a partial reprieve for Japan eight days after his first announcement.
The Nikkei 225 has risen 65 per cent from its post-tariff announcement low and on 28 October 2025 breached the 50,000 mark to trade at all-time high.
Japan also saw strong wage growth in the spring, while continued investment into software and digitisation are offsetting structural problems like labour shortages.
Taketsume said: ‘This is an environment in which Japanese companies appear to be regaining pricing power for the first time in decades. When coupled with improved consumer purchasing power through wage increases, this should drive healthy levels of corporate earnings growth.’
Embracing AI
Whilst the US and China are viewed as leaders in artificial intelligence, investors should not overlook the fact that Japan has its fair share of companies focused on the AI value chain. The benefit of investing in these, Schroders says, is they don’t face the same elevated valuations that US companies trade at.
The increasing adoption of generative AI around the world has proven especially beneficial to AI infrastructure firms in Japan.
Ibiden, an integrated circuit manufacturer that is held in the Schroder Japan Trust portfolio, for example, is beginning to see very positive payoffs from the rise of AI.
The increasing adoption of generative AI around the world has proven especially beneficial to AI infrastructure firms in Japan
The firm has invested significantly in its production capacity over recent years, expanding facilities in both Japan and the Philippines. This investment means that Ibiden is now well placed to capitalise on the rapid growth of AI demand.
Ibiden shares have risen almost 150 per cent over the past five years, and 114 per cent over the course of the last year.
But it’s not just about growth, Ibiden has also benefitted from the corporate governance shifts that have delivered higher dividend payments.
Another company the trust holds, datacentre infrastructure and optical cable manufacturer Fujikura, has seen huge growth as investors increasingly take note of its market dominance.
Fujikura is currently a leading light in the Nikkei index, with its shares having risen some 250 per cent in the past year alone.
Takestume said: ‘The surge of global interest in generative artificial intelligence (AI) is proving particularly beneficial for Japanese companies involved with the AI infrastructure supply chain. We have maintained exposure to AI as we believe their ability to capture the AI-driven growth opportunity is not yet fully reflected in valuations.
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Past performance is not a guide to future performance and may not be repeated. The value of investments and the income received from them may go down as well up and investors may not get back the amounts originally invested.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.