Japanese equities rose strongly in February, with both the Nikkei 225 and TOPIX up 10.4% to new closing highs. The advance was supported by expectations that the Liberal Democratic Party’s (LDP’s) election result would aid policy delivery and provide a steadier backdrop for implementation.
Through the month, sentiment was helped by resilient U.S. technology shares and, towards month end, a softer view on the likelihood of an imminent Bank Of Japan (BOJ) rate increase. On the macro side, Q4 2025 real GDP was revised up to +0.3% quarter on quarter (annualised +1.3%), indicating firmer private capex alongside better household and public sector demand, while the Economy Watchers Survey improved to 48.9, suggesting a gradual pickup in activity. After tensions in the Middle East increased, markets pushed back the timing of BOJ normalisation. Safe-haven flows reduced the two-year JGB yield, and expectations for near-term rate hikes became more tempered.
Early March then saw a pullback of roughly 10% from late February highs as risk appetite weakened, but we read this mainly as a valuation reset rather than a shift in fundamentals, particularly given that earnings expectations remain broadly intact and forward Price to Earnings (P/E) moved from the high 17× area at end February to around 15.8× after the 9 March selloff.
Against this backdrop, we maintain a constructive medium-term view and look for selective opportunities to add on weakness over a six to twelve months horizon, focusing on companies with clearer exposure to capex-related demand, demonstrable pricing power, and credible plans for balance sheet optimisation.
We recognise that near-term conditions can still be uneven — geopolitics and BOJ related pricing may continue to drive headline-led swings — so we favour measured implementation, with position sizing and risk controls aligned to current volatility, while allowing for the possibility that steady earnings delivery and incremental governance progress can guide valuations back toward higher ranges over the coming quarters.
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Written by Kazuhiko Hosaka, Senior Product Specialist, Asset Management One Co., Ltd