Japan’s equity markets are regaining momentum in a dramatic rebound driven by shifting macro forces, making it a compelling focal point for investors eyeing Asia’s next inflection point. As trade discussions heat up and inflation surges, the landscape is transforming, carving out new opportunities in a market that had appeared stagnant.
The Nikkei 225 has bounced back with force, rising over 170 points as investor sentiment turns positive in response to stabilising US fiscal indicators and a weaker yen. Export-heavy sectors such as electric appliances and semiconductors are powering ahead, reflecting renewed demand and confidence off the back of strong manufacturing data in the US. This dynamic is reinvigorating investor interest in Japan’s global-facing industries, which stand to benefit from enhanced price competitiveness.
Trade relations are now centre stage. Recent discussions between Japanese and US trade representatives have revived optimism around potential tariff adjustments, setting a more constructive tone for the months ahead. Investors are recalibrating in anticipation of more accommodative trade terms, further fuelling momentum in Japan’s export sectors.
Simultaneously, the currency environment is working in Japan’s favour. The yen’s continued depreciation against the dollar is providing a competitive edge for Japanese exporters. This currency tailwind is amplifying returns in sectors that had previously underperformed, creating new avenues for strategic capital allocation.
However, this upswing is unfolding against a backdrop of heightened inflation. Core inflation surged to 3.5% in April, the fastest rate in two years, while overall inflation reached 3.6%. These figures are sharpening focus on the Bank of Japan, which now faces mounting pressure to adjust its ultra-loose monetary policy. The bond market has already responded, with long-term Japanese government bond yields hitting record highs before moderating slightly, a sign of investor unease around the sustainability of Japan’s fiscal path.
Oil stocks, by contrast, have underperformed in recent sessions as crude prices softened. This divergence highlights the shifting composition of market leadership, where energy names retreat and tech and manufacturing surge ahead. Investors should take note: the market’s internal rotation is revealing the segments most likely to outperform in the next phase of the economic cycle.
What is emerging is a rebalanced Japanese market, one that is responding in real time to complex and sometimes competing signals. Trade optimism, yen-driven export gains, and robust external demand are counterbalanced by inflationary pressures and concerns about debt sustainability. Yet the overall tone is constructive. Strategic investors are using this moment to reposition, recognising that Japan may once again be stepping into a leadership role in Asia’s financial narrative.
Continued attention should be paid to upcoming bond auctions, central bank commentary, and any concrete developments from trade negotiations. If trade breakthroughs materialise and inflationary forces are managed with precision, Japan’s equity market could remain in recovery mode with a solid foundation.
Fidelity Japan Trust PLC (LON:FJV) aims to be the primary investment choice for those seeking exposure to Japanese companies. The Trust employs a ‘growth at a reasonable price’ (GARP) investment style and approach, which involves identifying companies whose growth prospects are being undervalued or are not fully acknowledged by other investors.
