Wall Street investment banks unanimously optimistic: the Nikkei is expected to hit a new high again in 2025!

Stock strategists say 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 showed that after experiencing a roller-coaster market last year, both the Nikkei 225 index and the TOPIX index broke their peaks of over 30 years, with an expected increase of 7.8% and 8.6% respectively from last year's closing. Despite facing pressure from the possibility of the Bank of Japan raising interest rates, as well as uncertainty brought by the election of President Trump, analysts believe that as Japan transitions from a deflationary economy to a growth economy, corporate earnings will improve. Tomo Kinoshita, global market strategist at Sumitomo Asset Management Japan Ltd., said: "By 2025, the strength of the Japanese economy will help boost the Japanese stock market. With strong domestic demand recognized, the performance of the Japanese stock market may outperform other stock markets in Asia." Key changes such as the unravelling of cross-shareholdings by Japanese companies and the rise of shareholder activism have brought positive news to 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 Japan prepares for the summer elections in the House of Councillors, there is also an increased risk of market volatility. In October of last year, the ruling coalition in Japan lost the majority in the election for the first time since 2009. Key themes for Japanese in 2025 that market stock analysts are focusing on include: Corporate governance and activism Shareholder activism is expected to accelerate, with a focus on improving capital efficiency and increasing shareholder returns, which is seen as stimulating M&A activity. According to compiled data, Japan saw a record level of activist shareholder investments in 2024. Rieko Otsuka, strategist at MCP Asset Management Japan Ltd., said that activist investors' actions could be one of the factors strengthening the momentum of the Japanese stock market. There is an increasing awareness that it is necessary 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 not acquire new shares. Non-life insurance companies have increased efforts to close such holdings, prompting hopes of increasing shareholder returns through stock buybacks and dividends, making non-life insurance the best-performing sector in the TOPIX index in 2024. The industry's return of 60.3% easily surpassed the index's return of 17.7% in 2024. Junichi Inoue, portfolio manager at Janus Henderson Investors Japan Ltd., said: "Valuations are already very attractive, and the index may rise as earnings per share increase. If corporate governance reforms accelerate, we may further see a revaluation." 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 rate hike in 2025. Financial sector stocks may continue their outstanding performance this year, as rising interest rates boost bank lending income and benefit from the sale of cross-shareholdings. Bruce Kirk and other strategists at Goldman Sachs Japan Ltd. wrote in a report: "We expect Japan-related financial stocks to continue to attract investors' interest in 2025. We also expect that the continued reduction of cross-shareholdings by large banks and property insurance companies, as well as continued self-help measures to further increase net asset returns, should also support this outstanding performance." However, the interest rate gap between Japan and the United States may still be significant, with traders reducing bets on a yen rebound, as the Bank of Japan may wait longer before the next rate hike. The Bank of Japan may introduce quantitative tightening policies, and Japanese government bonds are also expected to face pressure. Trump Policies With Trump back in the White House, US trade policies will be a major disadvantage for Japanese companies. Concerns are raised about tariff increases and tensions between the US and China. Japan's trade volume with China is $334.7 billion, followed by $230.98 billion with the United States. Although the outlook for the semiconductor and automotive industries is still uncertain due to Trump's policies, Morgan Stanley's analysis shows that Japanese companies may show resilience, with over half of their North American revenue coming from goods and services produced in the United States. Nomura Securities wrote in a report that Japan may also maintain its position as an important partner for the United States, and the impact of such tariffs on corporate profits is unlikely to be significant. Naomi Fink, Chief Global Strategist at Jefferies Asset Management Co., Ltd. said: "As the market is primarily driven by speculation (plus tariff threats), investors have been relatively negative on the impact of tariffs, partly due to the uncertainty itself." She added that for Japan, with companies and households holding a lot of cash staying on the sidelines, "we will consider this temporary decline as a good buying opportunity."