Japan stocks look set for new highs in 2025 on earnings, reform
But the yen may remain under pressure
JAPANESE stocks are poised to reach new record highs in 2025, driven by corporate governance reforms and robust earnings, according to equities strategists.
After a roller-coaster ride last year that saw the Nikkei 225 Stock Average and the Topix index surpass peaks that had stood for more than three decades, the gauges are projected to advance by a median of 7.8 per cent and 8.6 per cent, respectively, from last year’s close, according to a survey conducted by Bloomberg.
Despite pressure from likely interest-rate hikes from the Bank of Japan (BOJ) and uncertainty caused by Donald Trump’s presidency, analysts see better corporate earnings as Japan transitions to a growth economy from a deflationary one.
“The year 2025 will be one in which the strength of the Japanese economy will help to push up Japanese stocks,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan. “Japan’s equities may outperform stocks in other Asian regions, as the strength of domestic demand is recognised.”
While pivotal changes such as the unwinding of cross-holdings by Japanese companies and growing shareholder activism provide tailwinds to stocks, the yen may remain under pressure from the wide interest-rate gap between Japan and many other economies, further boosting exporters.
Market volatility is also at risk of rising in the run-up to an Upper House vote in the summer, after Japan’s ruling coalition lost its majority in an election in October for the first time since 2009.
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Here are key themes that market equities analysts are focused on for Japan in 2025:
Corporate governance and activism
Shareholder activism is set to accelerate, with focus on improving capital efficiency and raising shareholder returns, which in turn are seen stoking mergers and acquisitions activity. Japan saw record investments from activists in 2024, according to data compiled by Bloomberg Intelligence.
Activist manoeuvres could be “one of the factors that will strengthen the momentum of Japanese stocks”, said Rieko Otsuka, a strategist at MCP Asset Management Japan. “There is a growing awareness of the need to use capital efficiently, and to improve the performance of companies that are performing poorly from the perspective of shareholders.”
The General Insurance Association of Japan last year urged its member companies to cut their cross-holdings and not to acquire new stakes. Non-life insurers ramped up unwinding of such holdings, sparking hopes of improved shareholder returns via share buybacks and dividends, making this sector the top performer of 2024 on the Topix. The sector’s 60.3 per cent return in 2024 handily outperformed the index’s 17.7 per cent.
“Valuations are already attractive, and the indices are likely to advance in line with EPS (earnings per share) growth, with the potential for further rerating if corporate governance reform accelerates,” said Junichi Inoue, a portfolio manager at Janus Henderson Investors Japan.
Interest rates
BOJ remains an outlier in a world where most central banks are seen easing monetary policies, with economists forecasting at least one rate hike in 2025.
Financials may extend their outperformance this year as higher rates boost lenders’ lending income, and on gains from cross-holdings sales.
“We would expect Japanese finance-related stocks to continue to attract investor interest in 2025,” strategists including Bruce Kirk at Goldman Sachs Japan wrote in a note. “We also expect continued cross-shareholding unwinds from mega banks and P&C (property and casualty) insurers, as well as continued self-help measures to drive further improvements in ROE (return on equity), should also be supportive of this out-performance.”
But the interest-rate gap with the US may remain wide, with traders already trimming their bets on the yen rally as the BOJ may possibly wait longer for the next hike. Japanese government bonds are also expected to come under pressure from BOJ’s possible launch of quantitative tightening.
Trump presidency
US trade policies will be a major headwind for Japanese companies as Donald Trump returns to the White House amid concerns about higher tariffs and fractious US-China relations. Japan’s total trade with China is at US$334.7 billion followed by that with the US, which stands at about US$231 billion.
While the outlook for semiconductors and the auto sector remains uncertain due to Trump’s policies, Japanese companies may show resilience with more than half of their North American revenue from goods and services produced in the US, according to analysis from Morgan Stanley.
Japan is also likely to maintain its status as a key partner for the US and the impact of such levies on corporate earnings is unlikely to be substantial, Nomura wrote in a report.
Naomi Fink, chief global strategist at Nikko Asset Management, said: “Since it is mostly speculation (plus threats of tariffs) that is driving the markets, investors have been already relatively negative with respect to the impact of tariffs, in part due to the uncertainty itself.”
For Japan, “there is significant cash sitting on the sidelines – by corporates and households – we would see such interim dips as good opportunities for buying”, she added. BLOOMBERG
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