Asia wrap : Tokyo’s market faces its next act

Rising Sun and sharpened pencils

Traders worldwide have come back from their long summer break not quietly but with the bustling energy reflecting busy trading floors.

The Topix sits close to all-time highs, hedge fund books are lighter after a season of de-grossing, and yet, the weight of foreign capital, corporate buybacks, and sectoral shifts is still keeping the Nikkei’s sails full. What we’re watching now is less about whether Japan has run its course, and more about how the cast of characters — funds, corporates, politicians, and global allocators — will script the next act.

Hedge fund managers have kept pace respectably with the benchmark, up +14.5% against the Topix’s +18%, though the real story is in their posture: overweight Industrials, Materials, and Healthcare, shunning Consumer Discretionary and IT like stale sushi on a Tokyo conveyor belt. This isn’t random; it’s the calculus of managers recognizing where flows cluster and where domestic resilience still outshines export cyclicality. The gross allocations remain near historical highs, proof that while funds trimmed sails through summer, conviction in the Japan story hasn’t vanished.

If hedge funds are the chorus, foreign flows are the lead vocal — and U.S. investors are singing the loudest. Over the last five months, U.S. funds have poured in ¥1.3 trillion, their fastest net buying since the dawn of Abenomics. That preference tilts toward blue-chip Nikkei names over the broader Topix, and it’s not lost on anyone that U.S. long-only and macro allocators have kept Japanese mega-banks firmly in view. This is the sort of flow that doesn’t just provide liquidity — it shapes narratives, pulling global portfolios back into Japan’s orbit.

Politics, inevitably, injects uncertainty. Prime Minister Ishiba’s footing is less secure with the LDP losing majority in both houses, and whispers of an early party election swirl against the backdrop of the September 18–19 BOJ meeting. Inflation above 3% keeps the market guessing on rate normalization, though the base case remains January 2026 for the next hike. Traders, however, know better than to wait for economists’ timelines; positioning shifts with the rumor mill, not the academic models.

The corporate side of the tape is equally revealing. Buybacks remain the single largest demand force, with companies having soaked up nearly ¥7 trillion in shares year-to-date — a pace 1.7 times faster than last year. Earnings, too, held their ground, with positive surprises dominating and domestic demand names besting exporters. The cross-holdings unwind remains an untapped vein of value — a decades-old quirk of Japanese corporate culture that is slowly being mined out, providing incremental catalysts for balance-sheet cleanup and higher ROE.

Financials, meanwhile, are back on the menu. MUFG trades at just 1.4x book, yet strong earnings, credible buyback chatter, and the faint scent of another BOJ hike have stirred renewed interest. The trade is still under-owned relative to last year, which gives it legs if the rate narrative stiffens.

Sectorally, the shipbuilding rally (+62% YTD) is a reminder of Japan’s ability to surprise with old-world industries when the cycle turns, while semiconductors remind us of its role in the AI supply chain. Disco, Advantest, and Hoya are not household names outside trading circles, but within Japan they’re shaping the contour of the AI build-out. Hybrid bonding and advanced packaging are not cocktail chatter, but they’re the kind of inflection points traders who’ve lived through past tech cycles recognize — underpriced growth curves that suddenly re-rate.

Taken together, Japan’s market is no longer the overlooked cousin in Asia. It’s center stage, with foreign flows deepening, corporates playing shareholder-friendly offense, and politicians wobbling just enough to keep risk premium priced in. The index highs may look like a ceiling, but when the underlying currents — buybacks, U.S. capital, sector rotation — are this strong, ceilings often become floors.

This is not just another Japan rally. It’s the reassembly of market structure — from foreign allocators recalibrating exposure, to corporates buying back stock, to funds shifting sector weightings. Traders know these are the quiet but durable mechanics that set the stage for the next big trade. Japan may be near the top, but the tape still feels more like coiled spring than spent rubber band.

The Tianjin show: When the dancefloor became the chessboard

What happened in Tianjin wasn’t a mere summit—it was choreography on a geopolitical dancefloor. The setting: a city that has become a gleaming emblem of China’s economic ascent. The soundtrack: the steady beat of multipolar momentum, with the SCO stepping into the limelight much like BRICS did last year. And the partners: bear, dragon, and elephant, each bringing their own rhythm but agreeing, finally, to move in sync.

The gathering was less about platitudes and more about codifying a new grammar of power. Xi laid down the guiding principles—sovereign equality, respect for international law, multilateralism stripped of Western varnish, and a “people-centered” approach. The message was unmistakable: forget the shifting “rules-based order” that bends with Western wind. This is an attempt to build something structural, anchored in the institutions of Eurasia itself. The notion of a SCO Development Bank may look technocratic on paper, but it’s actually tectonic—a parallel rail line alongside the BRICS bank and AIIB, creating a financial spine for Eurasian integration.

Putin’s presence wasn’t ornamental. His call for a pan-Eurasian security model tied neatly into the idea of indivisibility of security, the same concept Moscow once tried to sell Washington in 2021. This time the audience was receptive. And with Modi finally back on Chinese soil after seven years, the optic of dragon and elephant nodding at shared responsibility carried as much weight as any communique.

The Tianjin Declaration might not have had the length of Kazan’s, but it hit the core beats: sovereignty above all, rejection of external interference, dismissal of sanctions as blunt coercion. That stance doesn’t just cover members; it stretches to partners across the Arab Gulf and Southeast Asia, where projects from CPEC to Belarus industrial zones already plug into Beijing’s Belt and Road circuitry.

It’s worth remembering how far the SCO has traveled. From a modest pavilion in a Shanghai park in 2001—months before 9/11 recast the world under the banner of the “war on terror”—to now, commanding a geography that holds half the world’s population. NATO expanded with tanks and treaties; the SCO advanced with pipelines, fiber cables, and trade corridors. What began as an anti-terror forum now reads as a proto-civilizational bloc with ambitions in AI, big data, and cross-border e-commerce.

The contrast is stark: the Shanghai Spirit of mutual respect and hard work has quietly outlasted the fever of America’s war on terror. And Xi’s closing toast in Tianjin underscored that ethos: in a race of a hundred boats, those who row hardest lead. Tianjin itself—once a gritty port, now a city of glass towers and high-speed trains—stood as proof that work, not ideology, defines outcomes.

This was no sterile summit. It was a declaration that Eurasia has decided to move to its own tempo, to shed Cold War choreography, and to draft a new score in which the West is no longer conductor. The music may still be dissonant, the steps unpracticed, but the dance has begun—and it’s happening on a floor that spans from St. Petersburg to Shanghai, Delhi to Doha.