Wall Street investment banks unanimously bullish: Japanese stocks are expected to hit new highs in 2025!

According to Zhitong Finance, stock strategists indicate that driven by corporate governance reforms and strong earnings, the Japanese stock market is expected to reach a new historical high in 2025. A survey conducted by institutions shows that after last year's roller coaster market, the Nikkei 225 Index and the TOPIX Index have both surpassed peaks not seen in over 30 years, with expectations that these two indices will rise by 7.8% and 8.6% respectively compared to last year's closing.

Despite facing pressure from the possibility of interest rate hikes by the Bank of Japan and uncertainties brought about by Trump's election as president, analysts believe that as Japan transitions from a deflationary economy to a growth-oriented economy, corporate earnings will improve.

Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan Ltd., stated, "In 2025, the strength of the Japanese economy will help boost the Japanese stock market. With strong domestic demand being recognized, the performance of the Japanese stock market may surpass that of other Asian markets."

Key changes such as Japanese companies unwinding cross-shareholdings and the rise of shareholder activism are favorable for the stock market. The significant interest rate gap between Japan and many other economies may continue to put pressure on the yen, further boosting exporters.

As the market prepares for the Japanese Senate vote this summer, there is also an increased risk of market volatility. In October last year, the ruling coalition in Japan lost its majority in the elections, marking the first time since 2009.

Here are the key themes that market stock analysts are focusing on for Japan in 2025:

Corporate Governance and Activism

Shareholder activism will accelerate, focusing on improving capital efficiency and increasing shareholder returns, which is seen as a stimulus for merger and acquisition activities. According to compiled data, Japan saw a record level of activist shareholder investments in 2024.

Rieko Otsuka, a strategist at MCP Asset Management Japan, stated that the actions of activist investors could be "one of the factors strengthening the momentum of the Japanese stock market, as there is an increasing awareness of the need to effectively utilize capital and improve the performance of companies that have underperformed from a shareholder perspective."

The General Insurance Association of Japan urged its member companies last year to reduce cross-shareholdings and refrain from acquiring new shares. Non-life insurance companies have intensified their efforts to unwind such holdings, raising hopes for increased shareholder returns through stock buybacks and dividends, making the non-life insurance sector the best-performing sector in the TOPIX Index in 2024. The sector's return rate of 60.3% easily surpassed the index's return rate of 17.7%.

Junichi Inoue, a portfolio manager at Janus Henderson Investors Japan Ltd., stated, "Valuations are already attractive, and the index may rise with the growth of earnings per share. If corporate governance reforms accelerate, valuations may further readjust." **

Interest Rates

In a world where most central banks are easing monetary policy, the Bank of Japan remains an outlier, with economists predicting at least one interest rate hike by 2025. Financial stocks may continue their strong performance this year, as rising interest rates boost bank lending income and benefit from cross-shareholdings sales.

Goldman Sachs Japan strategists, including Bruce Kirk, wrote in a report: "We expect Japanese financial-related stocks to continue attracting investor interest in 2025. We also anticipate that the ongoing reduction of cross-shareholdings by major banks and property insurers, along with sustained self-help measures that drive net asset returns higher, should support this strong performance."

However, the interest rate gap between Japan and the United States may still be significant, and traders have cut back on bets for a rebound in the yen, as the Bank of Japan may wait longer before its next rate hike. The Bank of Japan may introduce quantitative tightening policies, and Japanese government bonds are also expected to face pressure.

Trump's Policies

With Trump returning to the White House, U.S. trade policies will become a significant disadvantage for Japanese companies. There are concerns about tariff increases and tensions in U.S.-China relations. Japan's total trade with China amounts to $334.7 billion, followed by trade with the United States at $230.98 billion.

Despite the uncertain outlook for the semiconductor and automotive industries due to Trump's policies, Morgan Stanley's analysis shows that Japanese companies may demonstrate resilience, with more than half of their North American revenue coming from goods and services produced in the U.S. Nomura Securities stated in a report that Japan may also maintain its status as an important partner for the U.S., and the impact of such tariffs on corporate profits is unlikely to be significant.

Naomi Fink, Chief Global Strategist at Nikko Asset Management, stated: "As the market is primarily driven by speculation (along with tariff threats), investors have a relatively negative view of the impact of tariffs, partly due to the uncertainty itself." She added that for Japan, companies and households hold a significant amount of cash and are waiting on the sidelines, "We will view this temporary decline as a good buying opportunity."