Japanese stocks are set to reach new record highs in 2025, fueled by robust earnings and ongoing corporate governance reforms, according to market strategists. After a strong performance in 2023, with the Nikkei 225 and Topix indices surpassing three-decade-old peaks, analysts predict further gains of 7.8% and 8.6%, respectively, in 2025.
Despite potential challenges from expected interest rate hikes by the Bank of Japan and political uncertainties stemming from Donald Trump’s presidency, analysts remain optimistic about Japan’s transition from a deflationary to a growth economy. The continued strength of the Japanese economy is seen as a key driver of stock market performance.
Key Drivers of Growth for Japanese Stocks
Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan, emphasizes that Japan’s economic strength will significantly contribute to the performance of its stock market in 2025. “Japan’s equities may outperform stocks in other Asian regions, as the strength of domestic demand is recognized,” Kinoshita noted.
The country’s evolving corporate governance landscape, including the unwinding of cross-holdings by Japanese companies and increasing shareholder activism, is expected to continue providing a tailwind for stocks. These changes, along with a favorable environment for exporters, make Japanese equities particularly attractive in the coming year.
Corporate Governance and Shareholder Activism
Shareholder activism is anticipated to intensify in Japan in 2025, focusing on improving capital efficiency and raising shareholder returns. This activism is expected to spark more mergers and acquisitions (M&A) activity. Data from Bloomberg Intelligence highlights record investments from activists in Japan in 2024.
Rieko Otsuka, a strategist at MCP Asset Management Japan, believes that these activist moves will strengthen the momentum of Japanese stocks. “There is a growing awareness of the need to use capital efficiently and improve the performance of poorly performing companies from the perspective of shareholders,” Otsuka explained.
One notable shift has been seen in the insurance sector, with the General Insurance Association of Japan urging its members to cut cross-holdings and avoid acquiring new stakes. This has led to increased share buybacks and dividends, boosting returns and making the sector the top performer of 2024. The sector’s 60.3% return in 2024 outperformed the Topix index’s 17.7%.
“Valuations are already attractive, and indices are likely to rise in line with earnings per share (EPS) growth,” said Junichi Inoue, a portfolio manager at Janus Henderson Investors Japan. “Corporate governance reform could further accelerate this trend.”
Interest Rate Expectations and Financial Sector Outlook
Japan’s central bank remains an outlier in a world where most central banks are loosening monetary policies. Economists expect at least one rate hike in 2025, which could boost the financial sector. Higher rates are expected to increase lenders’ income from loans and enhance gains from the unwinding of cross-holdings.
Bruce Kirk of Goldman Sachs Japan highlighted that Japanese finance-related stocks will continue to attract investor interest. “We expect continued cross-shareholding unwinds from major banks and property & casualty (P&C) insurers, as well as ongoing self-improvement efforts to drive higher returns on equity (ROE),” Kirk noted.
However, the interest rate gap between Japan and other major economies, particularly the United States, may keep the yen under pressure. As traders adjust their expectations for a possible delay in a rate hike, the yen may continue to face headwinds.
Geopolitical Risks and the Trump Presidency
The return of Donald Trump to the White House presents potential risks for Japanese companies, especially with regard to US trade policies and heightened tensions between the US and China. Japan’s trade relations with China and the US are significant, with trade volumes reaching $334.7 billion and $230.98 billion, respectively.
While there is uncertainty regarding sectors like semiconductors and automobiles due to Trump’s policies, Japanese companies are expected to remain resilient. More than half of their North American revenue comes from goods and services produced in the US, according to Morgan Stanley.
Nomura analysts suggest that Japan is likely to maintain its strategic relationship with the US, and the impact of potential tariffs on corporate earnings may be limited. “The market is already factoring in the potential impact of tariffs, and significant cash reserves held by both corporations and households in Japan present opportunities for investors,” said Naomi Fink, chief global strategist at Nikko Asset Management.
Conclusion
Looking ahead, Japanese stocks are expected to benefit from a combination of strong earnings growth, corporate governance reforms, and favorable domestic demand. While challenges such as rising interest rates and geopolitical tensions remain, analysts believe that these factors will not overshadow the country’s positive economic outlook. With these catalysts in play, Japanese equities are well-positioned to continue their upward trajectory in 2025.
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