Japan’s equity markets are looking promising this year. Some estimates suggest corporate earnings are forecast to rise another 9.1% in 2025, on the back of a 7.9% jump in 2024. Further profit growth for Japanese prime market companies is therefore expected as the domestic economic recovery continues with the value of stocks likely to rise as profits climb.
Asset Management One is bullish. The asset manager expects the TOPIX index to reach 3,000 by the end of this year, up from 2,736 at the time of writing. And the forward price-to-earnings ratio of the TOPIX is expected to be 14x in the first half of 2025.
Asset Management One believes rising profitability will be driven by four factors.
One, a transition from a deflationary to a growth economy.
Two, progress in management reforms focused on capital costs and likely to boost share prices.
Three, the increasing strategic importance of Japan to the US under President Trump.
And four, a revitalisation through the government policy of “nation of asset management” – where the authorities want to promote the development of the asset management industry.
Importance of corporate governance
In addition, and on the second point listed, progress on management reforms focused on capital costs and likely to boost share prices, has come into sharper focus from Tokyo Stock Exchange (TSE) research, which suggests businesses that have improved their corporate governance have outperformed.
Companies in the prime market that responded to the reform saw an average share price increase of 28% during the previous 18 months versus 14% for companies that did not.
Companies that were chosen as good examples of reforms saw their share price rise by an average of 50% in the same period – a substantial fillip.
The TSE is urging companies to put in place in-depth plans to improve return on investment rather than just introduce temporary measures like share buybacks.
And the increased investor enthusiasm for Japanese equities is driven partly by corporates shifting their focus towards improving their share price performance.
Kazuhiko Hosaka, senior product specialist at Asset Management One, said: “Corporate reforms are becoming increasingly popular amongst businesses, and investors are continuing to benefit from what are expected to be significant share buyback activity.
“Firms are taking significant steps to focus more on enhancing their capital efficiency and share price performance – a great sign for overseas investors in the Japanese market,” he added.
Stability and resilience
Asset manager behemoth JP Morgan has also stated Japan is its preferred investment market for 2025, citing its macro-economic stability and resilience amidst global trade uncertainties.
The asset manager lists six reasons behind this outlook.
One is that Japan remains a top investment destination due to its macro-economic stability, mild inflation and resilience amid global trade uncertainties.
Two, Japanese equities are expected to deliver “low-teens” returns, supported by projected earnings growth of 9% in 2025 and the already cited significant structural reforms like improved corporate governance.
Three, the US-Japan trade relationship remains “stable”, but global trade uncertainty poses risks, particularly through potential spillover effects on Japan’s export-dependent economy.
Four, Japan’s tourism sector has rebounded strongly post-pandemic, contributing 7.5% to GDP and boosting employment and real estate markets.
Five, wage growth and inflation have created a “virtuous” cycle, with real wage growth turning positive, but productivity improvements needed for sustained economic expansion.
And six, Japanese equities remain undervalued compared to global peers like the S&P 500, offering attractive opportunities for “under-invested” domestic and international investors.
Tariff threats
Although there are challenges ahead, with one big question surrounding how Japan’s equity market and economy responds to threats of tariffs from the US.
Japan’s share of US imports has been low in recent years, at less than 5%.
However, the impact of tariff hikes on the car industry have been cited as a cause for concern. Cars are Japan’s top export to the US and are often transferred there through countries which may see higher tariff rate, such as Mexico, forcing costs to rise steeply.
Then there is the issue of inflation, which in Japan is rooted at 2% in the medium to long term. It is therefore possible for long-term interest rates to rise by around 2% to 3%.
It should be noted that The Bank of Japan is pursuing a policy of gradual monetary policy normalisation, with no immediate rush for rate hikes despite domestic and international pressures.
But even considering the impact of “quantitative tightening”, the rise in long-term interest rates is, according to many commentators, expected to remain relatively unchanged for the time being.
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