Navigating Japan Equities: Monthly Insights From Tokyo - Amova Asset Management

(MENAFN- ValueWalk) >This month Amova Asset Management's Chief Strategist, Naoki Kamiyama, assess the factors that drove the Nikkei to a recent record high and compare market conditions from 2024, the last time the index hit a peak; we also summarise the points to watch when the BOJ holds its policy meeting later in September amid a persistent rise in prices.

Table of Contents

Toggle

• Market displays greater confidence compared to 2024 as Nikkei hits record high
• BOJ's September policy meeting: what to look for
• Japan stocks gain in August on easing tariff uncertainty, strong GDP data

Market displays greater confidence compared to 2024 as Nikkei hits record high

Three key factors that drove Japanese equities to a record high

The Nikkei Stock Average hit an all-time high in August, marking a strong rebound after its April slump triggered by US tariff-related turbulence. In our view, there were three key factors behind the Nikkei's surge.

First is the upturn in domestic consumption and rising wages. The economy is continuing to show signs of recovery, especially in domestic demand. April–June 2025 corporate earnings were solid and GDP growth for the quarter exceeded an annualised 1%, showing that the impact of US tariffs has so far been limited. Perhaps the most important driver of the recent rally is expectations that domestic consumption will remain robust for the foreseeable future. Such expectations are based on views that the various government measures intended to ease price pressures-such as subsidies for utility bills, tuition support for high school students and the release of rice stockpiles-will eventually ease inflation and further boost consumption. If price pressures ease, consumers will have an extra incentive to spend as wages continue to rise on the back of a persistent labour shortage.

Second is the increase in US monetary policy easing expectations and the decrease in tariff-related uncertainty. Anticipation that the Federal Reserve (Fed) will cut interest rates has improved market sentiment. A rate cut by the Fed may weaken the dollar and result in a stronger yen, which is generally considered a negative factor for Japanese exporters. However, stable US demand is more crucial for Japan than currency levels. The main focus appears to be shifting from currency effects to corporate Japan maintaining US-bound export volumes. With the Fed seemingly poised to ease, Japanese export volumes could be maintained as lower interest rates may support US consumer confidence. Regarding US tariffs, Japanese companies are adapting; for example, some firms are opting to move production to the US. Their collective efforts suggest that corporate Japan, which now has a clearer picture than it did at the start of the current US administration, can now treat the tariffs as a one-off event.

Third is the underlying demand for semiconductors. Semiconductor-related firms are seeing steady earnings globally, and their Japanese peers are benefiting from this trend, especially those tied to AI and chip manufacturing equipment.

How the current market environment differs from last year's Nikkei peak

The fundamental drivers behind the Nikkei's record high have not changed much from those that buoyed the index to an all-time high during the market rally in 2024. The difference is that confidence levels are noticeably higher in all the aforementioned market-supportive factors. This is especially true regarding domestic consumption (although we have to keep in mind that higher rice prices still pose risks). Overall, the outlook for the Japanese economy is clearer. As we already mentioned, wage growth and labour shortages persist, tariff-related uncertainty has decreased and the Fed now has more room to cut rates. We believe that these factors make this year's equity market advance more sustainable. The market may experience short-term volatility due to US political developments and data releases, but the underlying positive drivers could persist over the next several years.

BOJ's September policy meeting: what to look for

When its board meets later in September, the Bank of Japan (BOJ) is unlikely to hike interest rates considering that the economic impact of US tariffs is yet to be fully gauged. We therefore do not expect the BOJ to act until December. While a rate hike may be a few months away, it is still worth observing the BOJ's latest stance on inflation. Although Japanese inflation is now above the central bank's target, the BOJ has not taken action as it is still watching how government policies (such as the subsidies mentioned in the first section) affect prices. A premature rate hike could backfire if inflationary pressures ease faster than expected, although the BOJ is sure to be also keeping an eye on food prices, which have stubbornly refused to come down and complicate the inflation outlook.

It may also be worth observing the BOJ's view on the Japanese government bond (JGB) market. While the 10-year JGB yield has risen to 17-year highs above 1.6% in September, it could be too early to say that the benchmark maturity now offers yields high enough to entice investors into bonds from other assets. This is because the BOJ's slow pace of rate hikes makes it difficult to predict the terminal rate. There are too many unknowns to forecast the terminal rate at this stage. However, it would be safe to assume that the current 10-year yield level will have to rise further before it is in line with the market's expected terminal rate.

Japan stocks gain in August on easing tariff uncertainty, strong GDP data

The Japanese equity market ended August higher with the TOPIX (w/dividends) up 4.52% on-month and the Nikkei 225 (w/dividends) rising 4.07%. In addition to fading uncertainty surrounding US tariff policy, Japan's preliminary real GDP figure for the April–June 2025 period surpassed market expectations, and Japanese stocks were seen as lagging behind European and US stocks. At the same time, both the US and Chinese governments announced another extension to the suspension of reciprocal tariff measures, alleviating concerns over the global economy and corporate earnings. Meanwhile, Fed Chair Powell signalled in his Jackson Hole speech that rate cuts were likely, and higher US stock prices provided a tailwind for Japanese equities.

Of the 33 Tokyo Stock Exchange sectors, 30 sectors rose, with Nonferrous Metals, Mining, and Electric Power & Gas posting the strongest gains. In contrast, only three sectors declined: Marine Transportation, Textiles & Apparel, and Pharmaceuticals.

MENAFN22092025005205011743ID1110092266