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Japan's market surge is still gaining speed -- here's what's driving it higher

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  Published in Stocks and Investing on Friday, September 12th 2025 at 6:27 GMT by Insider
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Japan’s Stock Market Continues its Upswing: What’s Driving the Surge and What It Means for Investors

The Japanese equity market has been on a steady climb, and the latest data suggests the rally is still gathering momentum. Over the past month, the Nikkei 225 index – the benchmark that tracks 225 of the country’s largest companies – has posted gains that have outpaced most global peers, buoyed by a mix of domestic fundamentals and an influx of foreign capital. Below is a concise overview of the key drivers, market dynamics, and what this means for investors looking to tap into Japan’s post‑pandemic recovery.

1. A Strong Core of Corporate Earnings

At the heart of the surge are the earnings reports that have come in from Japan’s corporate giants. In the first quarter of the year, several large firms posted profits that exceeded analyst expectations, with sectors such as technology, consumer goods, and automotive showing particularly robust performance.

• Tech: Companies like Sony and SoftBank saw their shares climb after a series of product launches and partnership announcements that signaled a rebound in demand for consumer electronics and AI services.
• Automotive: Toyota and Honda reported higher-than‑expected revenues from both domestic and export markets, partly due to rising demand for electric and hybrid vehicles as global automakers push into greener fleets.
• Consumer Goods: Retailers and food‑service companies benefited from a resurgence in tourism and domestic spending, reflecting the gradual reopening of Japan’s economy.

The earnings beat the consensus estimates, reinforcing confidence among both domestic and foreign investors that Japan’s corporate base can sustain growth in the medium term.

2. Foreign Investment Surges

Perhaps the most noticeable catalyst for the market’s ascent has been a sharp uptick in foreign institutional buying. According to data from the Bank of Japan’s “Foreign Portfolio Investment” reports, overseas investors have been adding more than $15 billion in equity holdings over the past two weeks, making Japan the top destination for foreign capital flows in Asia this quarter.

Several factors explain the surge:

• Favorable Valuations: The Nikkei is trading at a discount to its historical average, offering a cheaper entry point for risk‑seeking investors.
• Currency Support: The yen has been weak, which makes Japanese shares cheaper for overseas buyers. At the same time, a stronger dollar keeps Japanese exporters competitive on the global stage.
• Global Policy Drag: Tightening monetary policy in the United States and Europe has driven investors toward assets perceived as safe and yielding, with Japanese equities offering a blend of stability and upside.

The influx is not limited to big-name hedge funds; mutual funds, sovereign wealth funds, and even family offices have taken sizeable positions, citing the country’s robust corporate governance and long‑term growth prospects.

3. Monetary Policy and Government Support

Japan’s monetary policy remains dovish, with the Bank of Japan (BOJ) maintaining its negative‑interest‑rate regime and a continued commitment to its “Yield Curve Control” framework. This policy mix keeps borrowing costs low for companies, which helps support earnings and valuations.

On the fiscal front, the government’s “Growth Strategy” includes targeted subsidies for technology and renewable energy sectors, along with tax incentives for R&D. These measures are designed to bolster domestic innovation and keep Japanese firms competitive against rising global rivals such as Chinese and Korean tech giants.

4. Sectoral Winners and Losers

While the Nikkei is broadly up, certain sectors have outperformed:

Conversely, traditional heavy industries such as steel and construction have lagged, reflecting slower global demand and domestic regulatory changes.

5. What the Trend Suggests for the Near Future

Analysts project that the rally could persist as long as corporate earnings continue to beat expectations and foreign capital remains attracted by Japan’s value proposition. However, several risks loom:

• Rising Interest Rates: A global shift toward tightening could pressure equity valuations, especially in sectors sensitive to borrowing costs.
• Geopolitical Tensions: Trade disputes or regional security concerns may create volatility, given Japan’s reliance on export markets.
• Domestic Economic Slowdown: A slowdown in consumer spending or a resurgence of pandemic‑related restrictions could dampen corporate profitability.

Despite these headwinds, the current market environment offers an attractive entry point for long‑term investors. The Nikkei’s 12‑month return exceeds 18 %, and many analysts expect the index to continue climbing if earnings momentum stays strong.

6. Where to Find More Information

To stay ahead of market shifts, investors should monitor:

• Nikkei 225 index data: Real‑time updates on Yahoo! Finance or Bloomberg’s Japanese market portal.
• BOJ’s policy announcements: Monthly releases on the central bank’s website provide insight into monetary stance.
• Company earnings releases: Tokyo Stock Exchange’s investor relations pages and press releases from individual firms.

For a deeper dive into the macro‑economic backdrop, check out Bloomberg’s “Japan’s Economic Outlook” series and the Financial Times’ coverage of the BOJ’s “Yield Curve Control” policy.

Bottom Line

Japan’s equity market surge is a confluence of solid earnings, attractive valuations, and a wave of foreign investment. While the path ahead carries risks, the current environment presents a compelling case for investors to consider Japan as a key component of a diversified portfolio aimed at capturing growth in a stable, technology‑forward economy.