Henry McVey (Head, Global Macro & Asset Allocation) & Team
Field report following meetings with CEOs, policymakers, and investors in Tokyo
Bottom line
Japan remains one of the most fertile markets for active ownership and private equity. The deflation-to-inflation regime shift is creating simultaneous tailwinds across private credit, real estate, corporate restructuring, and physical AI — while the structural profitability gap signals that the best gains are still ahead. KKR remains constructive on deploying capital across both public and private markets, provided the yen holds near 160 JPY/USD and rates rise gradually.
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PM Takaichi's reflationary framework is deliberately shrinking sovereign debt while pushing corporates to absorb leverage for capex in defense, physical AI, and biotechnology. Japan is ground zero for the "Regime Change" thesis — nominal GDP, equities, and rates are all rising simultaneously (the "Triple Lindy"), an unusual but fragile equilibrium. Japan currently has the most negative real rates of any major economy KKR invests in, making it highly fertile for private equity and operational restructuring.
2. Banking system structural gap → private credit opportunity
As inflation erodes the traditional deposit base, banks can no longer fund the capex cycle Sanaenomics demands. The deposit-to-asset ratio has declined from 79% to 73% and continues falling. This structural gap is creating a significant entry point for non-bank lenders and private credit providers. Corporate carve-outs and non-core asset sales are accelerating as TSE pressure and activist campaigns intensify — Japan remains ground zero for this activity.
3. AI as existential necessity, not threat
Unlike in the U.S., there is no anxiety in Japan about AI displacing workers. Acute labor shortages across industries — worsened by booming inbound tourism on a weak yen — make automation a survival requirement. Generative AI adoption remains below trend (9.1% individual penetration vs. 81.2% in China), but Japan holds a defensible global lead in physical AI and industrial robotics, with Japanese firms (Fanuc, Epson, Kawasaki, Yaskawa, Denso) holding roughly 46% of global industrial robotics market share.
4. Corporate reform — ROE gap signals more upside ahead
Despite three prime ministers in 24 months, governance reform momentum is unbroken. TOPIX profit margins rose from 5.1% (2019) to 6.7% (2025), and ROE from 7.9% to 9.2%. But DuPont analysis makes clear the shortfall is structural — weak net margins and low asset turnover — not cyclical. The easy wins on excess cash and cross-shareholdings are done; operational improvement is the next, harder phase. The FSA's forthcoming governance code revision explicitly targets deployment of ¥174 trillion in idle corporate cash equivalents.
Key risks — where the thesis can break
Currency & rates
The constructive outlook is explicitly conditioned on the yen holding near 160 JPY/USD and long rates not rising too aggressively toward 3%. The Iran conflict makes a test of the 160 level increasingly likely in the near term.
Geopolitical commodity shock
Beyond oil, Asian and European companies are facing real shortages of helium, plastics, and fertilizers. Taiwan holds only 11 days of LNG inventory for TSMC — which consumes 10% of the country's total power — a fragility that markets are not yet adequately pricing. Japan's profile of low energy intensity but high import dependency makes it structurally exposed to Strait of Hormuz disruptions.
Governance risk — proposed takeover criteria
A new proposal on takeover criteria, viewed by many as too subjective, is an emerging concern flagged on the ground. Foreign investors specifically want assurance that nationalistic elements of Sanaenomics won't restrict entry and exit in key sectors, particularly technology. This risk is underappreciated in current market pricing.
Market complacency on "higher for longer"
KKR's comparison of the Iran conflict against prior dislocations (Ukraine invasion, Liberation Day) suggests that LNG pricing, leveraged loan spreads, and S&P 500 valuations have not fully discounted a prolonged inflationary shock. The global easing cycle has largely run its course; central banks including the RBA, ECB, and BoE are signalling a hawkish tilt.
Five actionable investment plays (KKR conclusion)
Security of everything — semiconductors, AI infrastructure, defense, supply chain resilience
Corporate carve-outs — M&A, divestitures, and portfolio reshaping driven by governance pressure
Infrastructure & energy — grid modernization, clean energy, nuclear, digital infrastructure
Physical AI & robotics — Japan's defensible and distinctive global manufacturing advantage
Wage-driven consumption — real wages now positive; preference for Japan's premium consumption segment
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