Japanese equities rose in July, supported by a Japan-U.S. tariff agreement that reduced automobile tariffs to 15%. Although political uncertainty and fiscal concerns followed the Upper House election, where the ruling coalition lost its majority, the TOPIX reached a record high on July 24, reflecting investor optimism about structural reforms and trade developments.
Following the Federal Open Market Committee (FOMC) and Bank of Japan (BOJ) meetings at the end of July, the yen depreciated, reaching the 150 range against the dollar. However, the release of weak U.S. payroll data on August 1 sparked concerns about a potential economic slowdown, leading to a partial retreat in dollar strength and creating headwinds for Japanese equities. Despite these external pressures, Japanese stocks demonstrated notable resilience, underpinned by increasing investor confidence in Japan’s structural corporate reforms and signs that the country may be emerging from its prolonged deflationary era.
Valuations have risen ahead of earnings, with Price-to-Earnings (P/E) multiples expanding faster than Earnings per Share (EPS). While this may temporarily slow market momentum, historical patterns suggest a second rally could follow once EPS recovers. Looking ahead, applying a 15x P/E to FY2026 consensus EPS implies a realistic TOPIX target of 3,200.
Risks include Japan’s political uncertainty, the $550 billion Japan-U.S. framework, and U.S. stagflation concerns, though expectations for fiscal stimulus and reform may help offset these headwinds.
Full article: pdf HERE
Written by Kazuhiko Hosaka, Senior Product Specialist, Asset Management One Co., Ltd.