Following the sharp drop in April, the Nikkei 225 index is on a tear. As of 10:20am this morning, the OSE Nikkei 225 Index Futures has finally breached the mythical 43,000 mark and is now hovering at the 43,270 mark. In this article, we will deep dive on what has changed in the fundamentals and what are some of the key catalysts for the bullish trend.
Catalyst 1 – Trade Deal
On 23 July 2025, Donald Trump said he reached a trade deal with Tokyo, which sets a 15% tariff (down from 25%) on imports from Japan. The pact calls for Japan to “open their country” to US auto and agricultural imports. Japan will also invest $550 billion into the US, the president said, without specifying further.
While details on sectoral levies on autos remain unknown, but it is unlikely that Japan would invest $550b without securing tariff concessions on automobiles, which is one of their key products for export.
Following this announcement, The Nikkei 225 +2.18% topped 40,000 (as of 08:48 SGT). The yen briefly strengthened, while JGB futures fell.
Naturally, the auto stocks soared after the announcement: Toyota Motors +10.11%, Nissan +6.94%, Honda +8.35%, Yamaha Motor +7.49%, Mazda +16.11%, Subaru +15.00%, and Mitsubishi Motors +13.23%. Automobile component manufacturer Denso gained 7.01%, semiconductor component manufacturer Minebea Mitsumi rose 6.93% and Fast Retailing (Uniqlo parent) also traced higher by 4.75%.
Japan’s chief trade negotiator said the US agreed to end stacking of universal tariffs and cut car levies at the same time. Reports indicate that tariffs on Japanese vehicles could be set in mid-September, around 50 days after the two countries’ agreement in late July. Under the agreement, the additional tariff will be lowered from 25 percent to 15 percent, but no specific date has been set.
Catalyst 2 – Sustained Economic Performance for Japan Stocks
More recently on 8 August 2025, the Nikkei 225 jumped 1.96% (as of 9:13am) on the back of a slew of strong earnings from index heavyweights.
1) Softbank Group Corp (+12.42%) rose after it swung to a quarterly profit, buoyed by gains from its Nvidia investment and AI startups.
- Softbank increased its Nvidia stake to more than $3b as of end-March.
- Also saw a recovery at its Vision Fund thanks to tech valuations and gains on holdings such as Coupang Inc, Auto1 Group SE, Symbotic Inc, and Swiggy Ltd; as well as the sale of assets such as T-Mobile US (sold $4.8b worth of its stake in the US telco, sold another $3b worth on Thursday, 7 Aug 2025)
- This comes despite the termination of Softbank’s 500b yen buyback program, which ended with the company having bought just 330b yen.
Sony (+5.00%) rallied after lifting its profit forecast on momentum in its entertainment divisions. Q1 profit rose 23% on increase in gaming and imaging operations.
- Sony produces image sensors used in Apple’s iPhone cameras and across the wider smartphone industry, which would be impacted by any US tariffs.
- Investors are encouraged by strength in business segments that are not exposed to tariffs like entertainment.
- Number of monthly active users on PlayStation platform rose 6% YoY. Ghost of Yotei, the sequel to the Sony’s hit game Ghost of Tsushima will be released in October.
- Anime operations are also expected to see improved earnings, led by the record-setting Demon Slayer movie earning ¥17.6b and drawing 12.6m viewers in Japan as of 3 Aug.
- Previously forecasted a tariff hit of 100b yen, but following Japan’s trade deal, now sees tariff impact of around 70b yen
- Management said that PS5 consoles sold in the US are already made outside China while production of other devices will be shifted outside China by September.
- 1QFY26 Operating Income grew by 22% YoY to ¥339.96b, above estimates of ¥290.64b. This was driven by an incredible 126.9% YoY growth in its Games & Network Services segment. The company raised its full-year 2026 operating income forecast to ¥1.33 trillion on strong momentum in its entertainment divisions.
Toyota Motors (+2.99%) gained despite cutting its fiscal 2025 Net profit forecast due to US tariffs, citing a potential 1.4 trillion yen tariff hit
- Operating Income fell 11% YoY, though it beat estimates.
- Price hikes in some regions helped lift results, as tariff impact for the period was about 450b yen.
- Shares rose as the forecast was seen as pessimistic, with peers like Subaru pegging the tariff hit at 210b yen, Nissan forecasted 300b yen, and Honda at 450b yen.
- Still logged record global sales during 1H25 thanks to strong demand for its gas-electric hybrid vehicles, mostly in the US, Japan and China.
Nintendo (+4.40%) jumped on reports that it sold 426,808 Switch 2 units in July alone.
Catalyst 3 – Political Landscape
Equities have also been boosted by speculation the government will look to expand fiscal stimulus after the ruling party saw a poor upper house election result.
PM Shigeru Ishiba is facing increased calls from within his ruling Liberal Democratic Party (LDP) to step down following the party’s upset defeat in an Upper House election in July . While he has denied any plans to resign, his fading support has made the administration vulnerable to calls for bigger fiscal spending and looser monetary policy. Many opposition parties have also urged the BOJ to hold off, or go slow, in raising rates and focus on supporting the economy instead.
Catalyst 4 – Other Supporting Drivers
1) Lower price to earnings (P/E) ratio versus the US markets
Compared to the highly traded US markets, the Japanese markets have a lower price to earnings (P/E) ratio than the US markets. For example, the P/E ratio for Netflix is 53.77 versus 35.51 for Fast Retailing.
2) Strong balance sheets and improving corporate governance
The other key value proposition of the Japanese markets would be their high corporate governance and strong financial record. Strong corporate governance ensures that the company is run responsibly, with high accountability and transparency to the shareholder. One of the key objectives of a company with strong corporate governance is focusing resources on protecting shareholder interest and fostering long-term sustainability.
3) Attractive valuation with share buybacks and dividends
The other value proposition for the Japan markets would be its attractive valuation versus the expensive US markets. Japanese stocks are also known to conduct share buybacks, when applicable, which drives up earnings per share, and they typically provide dividends which would be appealing to the long-term investor.
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