With Japan regaining its place as the second-biggest stock market amid growing trade tensions between the world\u2019s two largest economies, investors expect the nation\u2019s equities to garner more attention. Japanese shares were worth $6.15 trillion on Friday compared with just under $6 trillion for Chinese equities, according to data compiled by Bloomberg. The markets swapped position behind the U.S. for the first time since 2014, making Japan Asia\u2019s biggest stock market. While Chinese stocks have suffered recently from the country\u2019s ongoing trade spat with the U.S., their Japanese peers have benefited from improved earnings and the Bank of Japan\u2019s annual purchase of up to 6 trillion yen ($54 billion) in exchange-traded funds. Still, market observers are divided over what impact the mounting trade war might have on Japan. \u201cIf China and the U.S. are going to throw bricks at each other\u2019s windows, it pays to be the one that sells glass to both sides,\u201d said Nicholas Smith, an equity strategist at CLSA Ltd. \u201cThat\u2019s Japan.\u201d The Topix index has lost 4.1 percent this year, compared with a 17 percent slide in the Shanghai Composite Index. Nearly 60 percent of companies listed on the Japanese benchmark that have reported earnings so far for the latest quarter have beaten analyst expectations. Big Beats \u201cWe\u2019ve seen some pretty big beats from some big companies including Sony, Hitachi and Fujitsu. That\u2019s the major driver,\u201d said Kieran Calder, head of Asia equity research at Union Bancaire Privee. He expects the positive trend in Japanese earnings to continue. First-quarter results suggest room for upward revisions of company guidance, which tend to be conservative at the start of the fiscal year, he said. With many firms basing their forecasts on the yen at 105 per dollar, the current level serves as a tailwind for those sensitive to currency movements, Calder added. Japan regaining the No. 2 spot calls attention to its \u201cmarket thrashing consensus earnings forecasts\u201d as well as its relatively appealing valuations, CLSA\u2019s Smith said. External Economies Japan remains dependent on external economies such as China and U.S. as well as on a weaker yen, said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management. Corporate earnings should remain solid \u201cas long as we see a continuing strong expansion in the U.S. economy, and action by China to support their economy by increasing fiscal spending and easing monetary policy.\u201d Corporate Governance Enthusiasm \u201cThere is a newfound enthusiasm for corporate governance that is manifesting with announced share buybacks year-to-date being up in value terms by over 25 percent year-on-year,\u201d said CLSA\u2019s Smith. In Japan 58 percent of Topix non-financials are net cash, and \u201cat last shareholders are starting to unlock some of that hitherto trapped value.\u201d Political stability, an attractive valuation compared with other developed markets and signs of improving corporate governance are fueling Nomura\u2019s optimism on Japan\u2019s equity market, said Nomura Holdings Inc. strategist Jim McCafferty. The firm is overweight on the shares. The 2014 publication of the stewardship code aiming at encouraging investors to be more forceful in demanding higher returns will lead to companies putting more money to work. As a result, they\u2019ll either expand their business or increase dividends or share buybacks, McCafferty said. Staying Neutral \u201cWe haven\u2019t changed our Japanese exposure in the last few months, maintaining a neutral exposure,\u201d said Daryl Liew, head of portfolio management at Reyl Singapore Pte. There have been \u201cno real red flags\u201d after \u201cdecent\u201d earnings results so far. \u201cJapan being No. 1 or No. 2 doesn\u2019t effect us at all as we are all about market and sector depth, as well as cheap transparent trading costs, which is something Japan offers well ahead of China,\u201d said Andrew Jackson, head of Japanese equities at Soochow CSSD Capital Markets. \u201cIt\u2019s more about volatility for me than anything.\u201d Re-discovering Japan \u201cThe news will make global investors pay more attention to Japan and that will result in re-discovering the attractions of Japanese companies,\u201d said Hideaki Fukuchi, Asia equity sales at Auerbach Grayson and Co. in New York. Retaking the No. 2 position was due to not only the better prospects of the Japanese economy but also Japanese companies\u2019 long-term efforts to pursue more advanced technologies, improve corporate efficiency and focus on better corporate governance, Fukuchi said.