Japan’s earnings surprise analysts to fuel bets for broad rally

JAPANESE companies posted their largest earnings beat in five years despite soaring oil costs, fueling hopes that strong profit growth across sectors can broaden the market rally beyond AI-related trades.

Some 71 per cent of local firms reported profits that exceeded analyst forecasts in the three months ended June, Bloomberg data showed, with aggregate net income at the 500 biggest companies topping 21 trillion yen (US$132 billion), eclipsing the previous record of about 18 trillion yen notched a year ago. 

Profitability also improved sharply, with Topix companies projected to post record margins of 9.3 per cent, the highest level since comparable data began more than three decades ago.

The results suggest Japan’s equity rally may be entering a new phase.

While gains during the last quarter have been concentrated in technology and artificial intelligence-related beneficiaries, the latest earnings season showed profit growth broadening as companies successfully passed on higher costs to customers.

“It wasn’t just exporters and semiconductor-related companies whose results exceeded expectations,” said Hiroki Takei, a strategist at Resona Holdings. “We saw better-than-expected earnings among domestic-demand companies. Investor interest has broadened compared with before, and I expect that situation to continue.

The resilience among domestic-oriented companies is particularly encouraging for investors because it suggests firms are gaining pricing power, helping lift profitability even amid elevated energy prices.

The trend of rising margins could also bolster further gains in equities, given the historic drag on valuations from weak corporate profitability. 

The Topix has risen more than 67 per cent from its April 2025 low on dollar-based returns following President Donald Trump’s Liberation Day tariff announcement, in line with the MSCI Asia Pacific Index’s 69 per cent gain.

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The broadening was evident across both export-oriented and domestic sectors. Among chip-related firms, shares of Advantest and Tokyo Electron have soared after their earnings beat market estimates.

Domestic-facing companies such as furniture retailer such as furniture chain operator Nitori Holdings, internet firm LY Corp, and software company Otsuka Corp also beat expectations.

By industry, profit declines were largely confined to sectors most exposed to the Middle East conflict, including airlines and utilities, while the majority industries posted higher earnings from a year earlier.

Yasuhiko Hirakawa, head of equity investment at Rakuten Investment Management, attributed the strong results in part to higher prices. “It feels like the effect of price increases is coming through,” he said. “I had expected companies to lag in passing on higher crude oil costs, causing margins to deteriorate first. Instead, the opposite has happened.”

The results came even as a preliminary estimate showed Japan’s economy unexpectedly slowed in the quarter, reflecting weakness in domestic consumption and capital spending. 

The earnings strength has also prompted analysts to raise profit forecasts.

Topix’s earnings-per-share estimate for this year has climbed 6.9 per cent since the end of June, higher than the 4.9 per cent rise in the S&P 500 index. While Japan still trails the AI-driven earnings boom in South Korea and Taiwan, it is significantly outperforming Europe and China as well.

Other tailwinds also supported earnings, including a weaker yen and one-off refunds related to Trump-era tariffs.

Even so, the market reaction pointed to a broader spread of profit growth. From July through mid-August, 77 per cent of Topix constituents advanced while the index gained 4.7 per cent.

By contrast, in the last earnings season, only 56 per cent of constituents rose even as the Topix surged 10.5 per cent, more than twice the gain seen so far this quarter

The shift is reinforcing expectations that Japan’s stock rally has room to run. Chisa Kobayashi, Japan equity strategist at UBS SuMi TRUST Wealth Management, noted that sectors that had lagged in the previous quarter, including gaming, food and healthcare, are now attracting buyers.

“We’ve been able to confirm that companies across a wide variety of sectors are successfully passing higher costs on through prices,” she said. “In that sense, there is reason to expect the market rally to be sustainable.” BLOOMBERG