Driven by corporate governance reforms and robust earnings, Japanese equities strategists are predicting a strong performance for the Nikkei 225 (^N225) Stock Average and the Topix (0P00006NXB.T) index in 2025.
Record-Breaking Performance Expected
According to a survey conducted by Bloomberg, the Nikkei 225 is projected to advance by a median 7.8% from last year’s close, while the Topix index is expected to rise by 8.6%. This would mark a new record high for both gauges.
Corporate Governance Reforms: A Key Driver
Pivotal changes such as the unwinding of cross-holdings by Japanese companies and growing shareholder activism are providing tailwinds to stocks. Activist maneuvers could be one of the factors that will strengthen the momentum of Japanese stocks, said Rieko Otsuka, a strategist at MCP Asset Management Japan.
Shareholder Activism on the Rise
Shareholder activism is set to accelerate in 2025, with a focus on improving capital efficiency and raising shareholder returns. This trend is expected to stoke M&A activity and drive up share prices.
Key Themes for Japan in 2025
Corporate Governance and Activism
"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 Ltd. "Japan’s equities may outperform stocks in other Asian regions as the strength of domestic demand is recognized."
Interest Rates
Despite pressure from likely interest-rate hikes from the Bank of Japan and uncertainty caused by Donald Trump’s presidency, analysts see better corporate earnings as Japan transitions to a growth economy from a deflationary one.
Interest Rate Hikes on the Horizon
The Bank of Japan remains an outlier in a world where most central banks are seen easing monetary policies. Economists forecast at least one rate hike in 2025.
Impact on Financials
Financials may extend their outperformance this year as higher rates boost lenders’ lending income, and 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 Co. wrote in a note. "We also expect continued cross-shareholding unwinds from mega banks and P&C insurers, as well as continued self-help measures to drive further improvements in ROE, should also be supportive of this out-performance."
US Trade Policies: A Major Headwind
Japanese companies will face challenges due to US trade policies under Donald Trump’s presidency. The outlook for semiconductors and the auto sector remains uncertain due to Trump’s policies.
Japan’s Resilience
However, Japanese companies may show resilience with more than half of their North American revenue from goods and services produced in the US. Nomura wrote in a report that Japan is likely to maintain its status as a key partner for the US and that the impact of such levies on corporate earnings is unlikely to be substantial.
Uncertainty and Opportunities
Naomi Fink, chief global strategist at Nikko Asset Management Co Ltd., 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.
Conclusion
Japanese stocks are poised to reach new record highs in 2025 driven by corporate governance reforms and robust earnings. While US trade policies present a challenge, Japanese companies may show resilience due to their strong domestic demand and diversified revenue streams.
