Japan's stock market bids farewell to the "AI solo dance"! 70% of companies profits exceed expectations, as AI computing power bottleneck + quality cash flow brew a comprehensive bull market.

Despite soaring oil prices, Japanese companies have delivered their most significant earnings performance exceeding expectations in five years, raising investors' hopes that strong profit growth across various sectors could drive market momentum beyond AI computing infrastructure-related trades into broader thematic areas. The market has begun to bet on a widespread bull market embracing comprehensive growth in the country's stock market. Undoubtedly, the unprecedented surge in AI infrastructure construction remains a vital cornerstone for the earnings resilience, valuation enhancement, and foreign capital influx in Japan's technology sector and the entire Japanese stock market. In contrast to the recent AI-driven stock markets in the United States and South Korea, Japan's market is unique because it does not boast direct AI chip/DRAM storage chip superpowers like Nvidia, AMD, Micron, Broadcom, Google, SK Hynix, and Samsung. Instead, Japan has a significant number of indispensable AI semiconductor-related assets deeply embedded in the AI computing industry chain, including Kioxia, Tokyo Electron, Advantest, DISCO, Lasertec, Socionext, SoftBank, and major MLCC players like Murata and Taiyo Yuden. Therefore, foreign capital generally views Japan as the "second battlefield" in the AI computing infrastructure industry chain. However, the latest earnings season data indicates that the growth rate of corporate profits in Japan is beginning to spread from these AI computing theme companies to the entire market. The Japanese stock market is transitioning from being driven by a few AI-weighted stocks to a systematic bull market supported by broad corporate earnings and high-quality cash flow generation. Data compiled by institutions show that approximately 71% of Japanese corporate profits exceeded analysts' consensus expectations in the three months ending in June. The net profit of the largest 500 Japanese companies collectively surpassed 21 trillion yen (approximately $132 billion), exceeding the previous record of around 18 trillion yen set a year ago. Corporate profitability has also significantly improved, with the profit margins of Topix constituent companies in Japan expected to reach a historical record of 9.3%, the highest level since comparable data became available over thirty years ago. As shown in the chart above, the earnings trajectory of Japanese companies seems unfazed by oil price concerns. From the AI computing theme to comprehensive domestic demand blooming! Record profit margins and the uptrend spreading to 77% of constituent stocks. These latest compiled performance metrics suggest that the upward trend in the Japanese stock market may be entering a new phase. Although the previous quarter and the performance since 2025 have mainly focused on technology stocks and AI computing infrastructure beneficiaries, the latest earnings season shows that as Japanese companies successfully pass higher costs onto consumers, profit growth is spreading across more industries. "Its not just export-oriented companies and AI semiconductor-related tech firms that have exceeded expectations," said Hironori Takei, a strategist at Resona Holdings. "We also see domestic demand-driven companies performing better than expected. Compared to before, investor interest has expanded to a broader field, and I expect this trend to continue." The resilience of domestically-oriented enterprises particularly encourages investors as it indicates that companies are gaining pricing power, allowing them to improve profitability even in the face of high energy costs. Given that weak corporate profitability has traditionally suppressed stock valuations in Japan and recent market trends have increasingly relied on the AI computing theme, the upward trend in profit margins may also provide strong support for further stock market gains. In U.S. dollar terms, since former President Donald Trump announced the "Liberation Day" tariffs, the Topix index has risen over 67% from its low in April 2025, roughly in line with the MSCI Asia-Pacific Index's 69% gain. As shown in the chart above, the unexpected historical record for Japanese corporate profit margins is evident. The trend of profit expansion is clearly visible in both export-oriented and domestically-driven sectors. In AI computing-related companies, global semiconductor equipment leaders Advantest and Tokyo Electron saw their stock prices soar after reporting earnings that exceeded market expectations. Companies mainly in the domestic demand market, such as furniture retailer Nitori Holdings Co., internet firm LY, and software company Otsuka Corp, also significantly outperformed market consensus expectations. By sector, the declining profit trend is mainly confined to industries severely impacted by conflicts in the Middle East, such as airlines and utilities, while the majority of industries have recorded profit growth compared to one year ago. Kazuhiko Hirakawa, head of equity investments at Rakuten Investment Management, attributed strong performance partly to price increases. "It feels like the effects of price hikes are starting to show," he said. "I initially expected companies to lag in passing on rising crude oil costs, leading to an early deterioration in profit margins. However, the opposite has been true." As these earnings announcements come to light, a preliminary estimate regarding the Japanese economy reveals a surprising slowdown in growth for the quarter due to weak domestic consumption and capital spending. Strong earnings performance has also prompted analysts to raise profit forecasts. Since the end of June, the expected earnings per share for the Topix index this year have risen by 6.9%, significantly higher than the S&P 500 index's 4.9% increase. Although Japan still lags behind the immensely strong earnings boom driven by AI in South Korea and Taiwan, its performance has considerably outpaced Europe and much of the Asia-Pacific region. As shown in the chart above, there has been a significant improvement in earnings, with upward adjustments to expected earnings per share for the 2026 calendar year in Japan being even more pronounced. The depreciation of the yen and other favorable factors, such as one-time refunds related to tariffs from the Trump administration, have also supported corporate profits. Even so, market performance clearly shows profit growth spreading to a wider array of sectors. From July to mid-August, the AI computing theme no longer stood alone, expanding to 77% of the Topix index constituent stocks rising, driving the index to a cumulative increase of 4.7% during the same period. In contrast, during the previous earnings season, although the Topix index surged by 10.5%more than double the increase for the current quarteronly 56% of constituent stocks had risen. This shift further strengthens expectations that there remains room for further increases in Japan's stock market. Chisa Kobayashi, a strategist for Japanese equities at UBS SuMi TRUST Wealth Management, noted that sectors that lagged last quarter, such as gaming, food, and healthcare, are now attracting buyers. "We have already been able to confirm that companies across all sectors are successfully passing higher costs through price increases," she stated. "In this sense, we have reason to expect that this market rally is sustainable." Japan's "AI computing + cash flow" combination: A new answer for global allocation? As of the June quarter, approximately 71% of corporate profits exceeded expectations, with the net profits of the 500 largest companies surpassing 21 trillion yen, exceeding the previous year's record of around 18 trillion yen. The profit margins of Topix constituent companies are expected to rise to the highest level since data became available at 9.3%. Since the end of June, the expected annual earnings per share for the Topix index have been revised up by 6.9%, exceeding the S&P 500's 4.9%. From July to mid-August, 77% of the constituent stocks rose, with these signs indicating that cost pass-through, a weak yen, and operating leverage are improving profitability from semiconductors to domestic demand sectors like retail, internet, and software, while airlines and utilities are among the few industries still significantly pressured by high oil prices. The unprecedented surge in AI infrastructure construction is a key cornerstone for the earnings resilience, valuation enhancement, and foreign capital influx in Japan's technology sector, as well as the fundamental logic behind the strong upward trend in Japan's stock market in recent years. Japanese companies with AI-related weight do not focus on AI GPU design or advanced wafer fabrication but rather capture multiple upstream process and component bottlenecks in the AI computing industry chain, making the immense demand for AI computing infrastructure directly drive the orders, product mix, and profit margins of companies like Kioxia, Advantest, and Tokyo Electron. This has formed a rare "Japanese AI shovel supplier cluster" through semiconductor equipment, advanced packaging, testing, memory, and key passive components. Moreover, the fact that 71% of companies exceeded expectations and 77% of constituent stocks rose further proves that Japanese companies have regained the long-lost advantage of pricing power. Domestically-oriented firms successfully passing on costs, banks benefiting from interest rate normalization, and exporters gaining from a weak yen, combined with corporate governance reforms, share buybacks, and capital efficiency improvements, together form a broad foundation for this round of profit expansion. This further suggests that the current strong bull market in Japan's stock market is constructed upon a dual engine of "AI high-growth engine + Japans re-inflation profit reconstruction." In terms of specific investment perspectives, capturing strong capital expenditures related to AI computing infrastructure through companies like Tokyo Electron, Advantest, DISCO, Lasertec, and Kioxia, while sharing the profit reconstruction of Japan through pricing power-oriented domestic companies and banks, reflects the core logic recognized by some foreign institutions regarding Japan's stock market as an "alternative answer." This is precisely because it is not as crowded and high-beta as the Philadelphia Semiconductor Index and the Nasdaq-100 Index. Instead, it embeds the AI computing growth factor into a highly diverse, low-concentration, and long-term high cash flow quality traditional industry equilibrium base. Japan's most appealing opportunity lies not simply in replicating large U.S. tech stocks but in allocating segment bottlenecks with technological barriers and pricing power within the global AI supply chain, while also incorporating high-quality domestic cash flow assets from sectors such as finance, software, consumer goods, and healthcare. AI equipment and storage stocks enjoy the highest earnings elasticity but also face risks of capital expenditure cycles, valuation crowding, and concentrated orders. The domestic demand and financial sectors can enhance the breadth of portfolios while hedging against the severe volatility caused by de-leveraging and crowded positions associated with AI computing trades.