Japanese equities are on track for a stellar year in 2025, with robust corporate earnings and sweeping governance reforms propelling the Nikkei Stock Average and Topix index to new heights. Following a record-breaking 2024, investors are eyeing further gains as Japan cements its transition from a deflationary to a growth-oriented economy.
Equities strategists predict the Nikkei and Topix to rise by 7.8% and 8.6% respectively, buoyed by key reforms and domestic economic strength. Invesco Asset Management Japan’s Tomo Kinoshita highlighted Japan’s growing appeal, with equities poised to outperform other Asian markets thanks to strong domestic demand. Despite headwinds such as anticipated Bank of Japan interest rate hikes and geopolitical uncertainties stemming from Donald Trump’s U.S. presidency, Japanese companies are expected to capitalise on their improving financial health and growing global competitiveness.
A pivotal factor underpinning this optimism is the accelerating momentum of corporate governance reforms. The unwinding of cross-holdings and an unprecedented wave of shareholder activism are creating a more efficient and shareholder-friendly corporate landscape. Activist investments surged to record levels in 2024, with firms increasingly prioritising returns and operational efficiency. According to MCP Asset Management Japan’s Rieko Otsuka, this heightened focus on capital efficiency and underperforming companies is likely to fuel mergers, acquisitions, and further stock momentum.
Non-life insurers emerged as a standout sector in 2024, driven by cross-holdings reductions and robust shareholder returns, delivering a remarkable 60.3% return against Topix’s 17.7%. As reforms deepen, experts like Janus Henderson Investors Japan’s Junichi Inoue anticipate attractive valuations and earnings growth to continue driving market gains in 2025.
Interest rates also remain in focus, with the Bank of Japan potentially raising rates amid a global easing trend. Higher rates are expected to benefit the financial sector, bolstering lending income and shareholder returns from cross-holdings sales. Mega banks and property and casualty insurers, in particular, are well-positioned for growth, supported by improved returns on equity and self-help initiatives, according to Goldman Sachs Japan.
However, challenges persist. The yen’s weakness, fuelled by a wide interest rate gap with other economies, is a double-edged sword. While exporters gain a competitive edge, market volatility could rise, especially ahead of Japan’s Upper House vote in the summer. Additionally, Trump’s return to the U.S. presidency introduces uncertainty. Trade tensions, particularly with China and the U.S.—Japan’s top trading partners—loom over critical sectors like semiconductors and automobiles. Yet, Japan’s resilience shines through, with a significant proportion of its North American revenue derived from goods produced domestically in the U.S., mitigating tariff risks.
As investors navigate these dynamics, analysts like Nikko Asset Management’s Naomi Fink see potential in market dips driven by speculative fears. Japan’s substantial corporate and household cash reserves could provide a strong base for renewed investment.
With transformative reforms, improving earnings, and favourable market conditions, Japanese equities are primed to lead the charge in 2025, setting new benchmarks and affirming their place as a global investment hotspot.
Japan is rapidly evolving into a growth-driven economy underpinned by robust corporate governance reforms, shareholder activism, and improving earnings. As these elements align, Japanese equities are well-positioned to deliver exceptional performance in 2025.
Fidelity Japan Trust PLC (LON:FJV) aims to be the key investment of choice for those seeking Japanese companies exposure. The Trust has a ‘growth at reasonable price’ (GARP) investment style and approach – which involves identifying companies whose growth prospects are being under-appreciated or are not fully recognised by other investors.
