Japan’s dividend engine is reviving up: This fund offers 6%+ yield

• Japan’s dividend-growth cycle is gaining momentum. BOJ rate normalisation is boosting bank margins and insurers’ reinvestment yields, while corporate governance reform is encouraging companies to return excess cash through higher dividends and buybacks.
  
  
• Financials provide the clearest near-term dividend catalyst. Megabanks are raising dividends on stronger earnings, while insurers such as Tokio Marine are combining improving profitability with the unwinding of strategic shareholdings to support higher shareholder returns.
  
  
• Industrials offer an earnings-led source of dividend growth. AI, data-centre, semiconductor, automation and robotics investment is driving demand for Japanese machinery, supporting earnings and providing a solid foundation for dividend growth.
  
  
• The fund trades some upside for income and resilience. Its dividend and quality tilt has weighed on one-year performance during the AI-driven rally, but the fund has delivered smaller drawdowns over five years.
  
  
• We recommend the unhedged SGD share class. As continued BOJ tightening eventually strengthens the yen, the unhedged share class could benefit from both Japan’s dividend and earnings growth and potential currency gains.

Japan's equity market has become increasingly associated with semiconductors, AI and technology. But beneath the headline-grabbing growth stories, another investment theme is quietly gaining momentum: dividend growth.

We believe Japan is entering a particularly favourable environment for income-oriented equities, driven by two powerful forces. First, the Bank of Japan's gradual policy normalisation is improving earnings prospects for financial institutions. Second, years of corporate governance reform are encouraging Japanese companies to deploy their substantial cash reserves more efficiently through higher dividends and share buybacks.

Monetary policy: Normalising, with more room to hike

The BOJ raised its policy rate to 1.00% in June 2026, its highest level in 31 years. For Japan's financial sector, the implications are significant. Rising interest rates allow banks to expand lending margins. Japan's three megabanks — Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG), and Mizuho Financial Group — reported record 1QFY2026 earnings, with profits rising 48%, 33% and 46% year-on-year (YoY) respectively. Core loan-to-deposit margins have also climbed to multi-year highs, providing a sustainable source of earnings growth (Figure 1).

Figure 1: Megabanks’ local loan-to-deposit margins have climbed to multi-year high

The benefits extend beyond banks. Higher JGB yields allow insurers to reinvest maturing lower-yielding fixed income securities into assets offering better returns. This gradual improvement in reinvestment yields is strengthening core profitability, particularly for life insurers. Dai-ichi Life Group provides a clear example: for FY2025, ended 31 March 2026, its positive spread — the gap between investment returns and guaranteed policy rates — widened by JPY54.0 billion to JPY226.9 billion, representing a 31% YoY increase.

More importantly, Japan's rate-normalisation cycle is not over. Governor Kazuo Ueda has continued to emphasise that financial conditions remain accommodative, while real wage growth stayed positive in 1H2026 and the BOJ's July Summary of Opinions highlighted upside risks to inflation. Together, these factors suggest that the case for further policy normalisation remains intact, with another rate hike increasingly likely in the months ahead.

Japan’s rate hikes have been gradual, data-dependent and well communicated. This makes it potentially easier for the financial sector to adjust while continuing to benefit from progressively higher margins and reinvestment yields.

Corporate governance reform: The structural engine behind rising payouts

Japan's ongoing governance transformation remains another powerful multi-year tailwind. The Tokyo Stock Exchange's push for companies to improve capital efficiency has placed increasing pressure on listed companies to make better use of their balance sheets.

For decades, many Japanese companies accumulated substantial cash reserves and maintained extensive cross-shareholdings. That is gradually changing. Companies are increasingly being encouraged to return more cash to shareholders through higher dividends and share buybacks, rather than allowing excess capital to remain idle.

The unwinding of cross-shareholdings provides an additional source of capital for these shareholder-return initiatives. Japan's megabanks, insurers and industrial conglomerates have continued to reduce strategic equity holdings, freeing up capital that can increasingly be redirected towards dividends and share buybacks. Major financial institutions are already making tangible progress. MUFG, for example, has sold approximately JPY460 billion of strategic shareholdings during its FY2024–FY2026 divestment programme, against a target of JPY700 billion. Meanwhile, Kyoto Financial Group is targeting more than JPY100 billion in strategic-shareholding divestments by around March 2029.

This structural release of capital is being reinforced by an improvement in corporate earnings. Japan's improving earnings cycle is broad-based, as all sectors recorded positive YoY growth in the quarter ended 30 June 2026 (Figure 2). The combination of more efficient balance sheets and stronger cash generation is giving companies greater scope to increase shareholder payouts. According to Nikkei estimates, dividends from companies listed on the Tokyo Stock Exchange are expected to rise by around 6% for the year ending 31 March 2027, reaching a sixth consecutive record high.

Figure 2: All TOPIX sectors delivered earnings growth in the quarter ended June 2026

 

Amova Japan Dividend Equity Fund: Positioned for dividend growth in Japan

The combination of BOJ policy normalisation and corporate governance reform creates an attractive backdrop for the Amova Japan Dividend Equity Fund. Managed by Amova Asset Management Asia, part of the Sumitomo Mitsui Trust Group, the fund invests in a diversified portfolio of TSE-listed companies with forward dividend yields above their respective industry averages.

However, the strategy is not simply about buying the highest-yielding stocks. The investment process combines dividend screening with bottom-up fundamental research to identify companies that have the ability to grow dividends while maintaining sustainable payout levels. The manager focuses on quality businesses with competitive advantages, strong cash-flow generation and the financial capacity to support shareholder distributions over time.

This disciplined process results in a relatively concentrated portfolio. As of 31 July 2026, the fund held 52 stocks, allowing its highest-conviction ideas to make a meaningful contribution.

The portfolio is built around two distinct dividend pillars: Financials and Industrials.

Pillar One: Financials — direct beneficiaries of higher rates

Financials account for 22.3% of the portfolio (Figure 3) and represent one of the clearest beneficiaries of Japan's transition away from its ultra-low interest-rate environment.

The sector is anchored by Japan's three megabanks — MUFG, SMFG and Mizuho — which are benefiting from the gradual expansion in lending spreads as interest rates normalise. The resulting improvement in profitability is increasing their capacity to return capital to shareholders, with all three banks guiding for higher dividends in FY2026.

Table 2: Dividend per share guidance for the megabanks

	FY2025 Dividend Per Share (JPY)	FY2026E Dividend Per Share (JPY)	YoY increase
MUFG	86	96	12%
SMFG	157	180	15%
Mizuho	145	150	3%
Source: MUFG, SMFG and Mizuho, iFAST compilations. Data as of 30 June 2026.

The opportunity extends beyond the banks. The fund also owns insurers such as Tokio Marine, which is stepping up capital returns as profitability improves and excess capital is released. Tokio Marine expects its annual dividend to rise from JPY218 per share in FY2025 to JPY245 in FY2026, while announcing JPY400 billion of share buybacks, its largest planned buyback since 2017. Tokio Marine also aims to eliminate its strategic shareholdings entirely by March 2030, freeing capital previously tied up in cross-shareholdings for more productive uses, including shareholder distributions. This provides an additional runway for capital returns alongside continued net income growth.

Pillar Two: Industrials — riding Japan's manufacturing and investment cycle

Industrials are an even larger 30.7% of the portfolio. The opportunity is broader than traditional manufacturing. Rising investment in AI, data centres, automation, robotics and semiconductor manufacturing is increasing demand for sophisticated machinery and production equipment. Japanese government support for domestic semiconductor capacity provides an additional source of capital spending. Crucially, this is showing up in actual orders. Japan’s machine-tool orders surged 50.4% YoY to JPY193.1 billion in July 2026, following a 52.8% increase in June.

The fund's holdings in Amada and DMG Mori provide direct exposure to this trend. Amada reported record first-quarter revenue of JPY100.21 billion in FY2026, up 29.7% YoY, driven by strong demand linked to data-centre investment and automation. The company also raised its annual dividend to JPY64 per share for FY2026 from JPY62 in FY2025 and announced a JPY50 billion share buyback. DMG Mori has seen similarly strong demand, with orders received rising 34.8% YoY between January and June 2026, supported by aerospace, defence and semiconductor demand. While its dividend was maintained at JPY105 per share, the combination of strong orders and earnings momentum provides scope to support shareholder returns as the cycle progresses.

This is an important distinction in the fund's income strategy. Industrials companies are critical contributors to dividend growth when rising orders translate into higher earnings and cash flow. Rather than owning the headline semiconductor companies that pays little dividends, the fund captures the "picks-and-shovels" side of the investment cycle through the machinery and equipment providers.

A broader portfolio built around cash-generation

The fund also has meaningful exposure to Consumer Discretionary (11.1%), including Toyota Motor. The dividend-growth case here is less straightforward, but Toyota demonstrates another characteristic the strategy looks for: the ability to continue returning capital despite cyclical headwinds.

Japan's automakers are operating in a more challenging environment, with US tariffs, intensifying Chinese competition and pricing pressure weighing on profitability. Yet Toyota raised its FY2026 dividend to JPY95 per share, guided towards JPY100 for FY2027, and announced a JPY1 trillion share buyback in August 2026.

Toyota therefore provides a useful counterpoint to the Financials and Industrials exposure. Its investment case is not based on an easy cyclical upswing, but on the company's scale, cash-generation capacity and ability to maintain shareholder distributions through a more difficult operating environment.

Taken together, the portfolio's income proposition is not simply about owning the highest-yielding Japanese stocks. It is about owning companies with multiple avenues to grow shareholder returns: stronger earnings from higher rates, rising capital spending, and the release of excess capital from balance-sheet restructuring.

Figure 3: Financials and Industrials anchor the portfolio's dividend engine

Table 1: Top 10 holdings of the fund

Holdings	Weight	Sector
Mitsubishi UFJ Financial Group	4.30%	Financials (megabank)
Sumitomo Mitsui Financial Group	4.30%	Financials (megabank)
Mizuho Financial Group	3.80%	Financials (megabank)
Tokio Marine Holdings	3.70%	Financials (insurance)
DMG Mori	3.20%	Industrials (machine tools)
Toyota Motor Corp	3.10%	Consumer Discretionary (auto)
ORIX Corporation	2.80%	Financials (diversified)
Amada Co.	2.60%	Industrials (machine tools)
Macnica Holdings	2.60%	Information Technology
Toyoda Gosei	2.50%	Industrials (auto parts)
Source: Amova Asset Management. Data as of 31 Jul 2026.

Performance: Income-oriented positioning trailed the broader market

As the only Japan-focused dividend strategy available on the iFAST platform, the fund offers investors a differentiated approach to the Japanese equity market. For comparison purposes, we have assessed its performance against the TOPIX, although the fund has removed a formal reference benchmark in 2017.

Over the one-, three- and five-year periods, the SGD share class has lagged the broader index. The gap has become particularly pronounced over the past year (Figure 4). However, this needs to be viewed in the context of what has driven Japan's equity market. The recent rally has been heavily influenced by AI-related technology stocks, including companies such as Tokyo Electron and SoftBank Group. These high-growth names have benefited disproportionately from investor enthusiasm surrounding AI and semiconductors — areas where an income-focused portfolio naturally has little exposure.

Figure 4: Annualised performance over the past five years

Looking at calendar-year performance, the fund delivered comparable performance or outperformed in most years, with much of the relative weakness concentrated in 2024 (Figure 5). During that year, Japan's rally was broad, driven by weak-yen-supported exporter earnings and a market-wide re-rating linked to corporate governance reform. At that stage, the BOJ had only just begun to exit negative interest rates. It ended the policy in March 2024, moving rates to 0–0.1%, before raising them to 0.25% in July. The rate increases were simply too limited for financial institutions to fully capture the earnings benefits that are becoming increasingly visible today.

Figure 5: Calendar year performance over the past five years

Downside protection is the fund's strongest characteristics

What stands out most clearly is the fund's ability to manage downside risk. Over five years, the SGD share class recorded a maximum drawdown of -25.7%, compared with -28.4% for the TOPIX. The SGD-hedged share class performed even better from a downside perspective, with a five-year maximum drawdown of -20.9%.

This reflects the nature of the portfolio. A quality and dividend tilt towards megabanks, insurers and cash-generative industrial companies can provide greater resilience than a broad market index with significant exposure to higher-multiple growth stocks.

The difference was particularly evident during more difficult market periods. In 2022, global central banks were aggressively raising interest rates while the BOJ remained committed to near-zero rates and Yield Curve Control. The widening interest-rate differential contributed to significant yen weakness, which compounded broader global risk-off sentiment. The fund weathered this environment better than the broader Japanese market, limiting losses to 10.3% for the unhedged share class.

More notably, the SGD-hedged share class gained around 6% over the year. This highlights the potential benefit of combining a quality, dividend-focused portfolio with active currency management, rather than relying solely on passive, unhedged index exposure.

Currency matters: The difference between SGD and SGD-hedged returns

The performance gap between the SGD and SGD-hedged share classes shows that currency consideration is important for investments. Over the five-year period, the yen weakened sharply against the Singapore dollar, with SGD1 rising from buying approximately JPY78 in January 2021to JPY125 in August 2026 — representing roughly a 60% depreciation in the yen against the SGD. The stronger performance of the hedged share class during this period demonstrates that currency movements can have an impact on returns that is independent of the underlying stock-selection strategy.

However, investors should be careful not to assume that the historical hedging benefit will automatically continue. The large currency advantage enjoyed by the hedged share class was partly driven by the exceptionally wide interest-rate differential between Japan and Singapore. Looking ahead, the case for hedging depends largely on the direction of the yen. In the near term, hedging could continue to provide protection if the yen remains weak against the Singapore dollar, particularly if MAS maintains a policy bias towards a stronger SGD. However, the calculus is likely to change if continued BOJ monetary tightening eventually supports a sustained yen appreciation. In that scenario, an unhedged position could outperform as SGD-based investors benefit from both the underlying Japanese equity returns and currency gains.

Amova Japan Dividend Equity Fund: The route to gain 6%+ income each month

Japan's next chapter may not be just about AI and semiconductors. As rates rise and corporate behaviour continues to change, dividend growth could become an increasingly important part of the Japanese equity story. The Amova Japan Dividend Equity Fund is positioned to capture it. 

For income-oriented investors, the fund has  maintained a monthly distribution schedule, targeting a yield of around 5–7%. The SGD share class recorded a 12-month distribution yield of 7.1% as of 31 July 2026, compared with an average payout yield of around 5.9% since its inception in 2016.

Given that the underlying portfolio dividend yield is unlikely to fully support distributions at this level, the fund manager notes that distributions may, where necessary, include capital. However, no capital was used to fund distributions over the past 12 months, according to the fund's distribution disclosures. The strong performance of the portfolio generated sufficient gains to support the elevated distribution level.

We also believe investors should consider their currency exposure carefully. For those taking a longer-term view, the unhedged share class could become increasingly attractive as continued BOJ tightening narrows the Japan-Singapore interest-rate differential and supports eventual yen appreciation.

The fund is available for investment via cash, SRS and CPF-OA, offering flexibility across different investor needs. For investors who already have exposure to Japan’s growth sectors, the Amova Japan Dividend Equity Fund could serve as a useful complementary allocation, adding an income-focused strategy with greater emphasis on financials, industrials, cash generation and downside resilience. For investors seeking to grow their CPF capital with a potentially smoother investment journey, the fund's historically shallower drawdowns also make it an option worth considering.

Declaration

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.