Why Japanese Stocks Conquered the World in 2025
How Nikkei 225 beat the US, China, the UK, India and the EU.
Disclaimer: This report is for informational purposes only and does not constitute financial advice
It is the last day of 2025, which means, it is time to reflect.
Ever since the Japan bubble burst of 1989, global investors spent years waiting for Japan to fail again.
They are still waiting. The Nikkei 225 closed yesterday at 50,340, surpassing the previous peak of 38,915 set back in December 1989.
While the S&P 500 struggled with valuation and tariff shocks, Tokyo returned over 26%. This rally was driven by a corporate governance revolution, a new political era under Prime Minister Sanae Takaichi, and a central bank that refused to kill the party.
2025 was the year Japan stopped apologizing for its economy and started monetizing it.
Part I: Japan vs. The World
Nikkei 225: +26.18% (Close: 50,339.48)
Topix: +22.41% (Close: 3,408.97)
Japan beat the world. The S&P 500 managed only 14% amid high valuations. Europe gained 17%, the UK rose 20%, China 16% and India a measly 9%. Japan won on a triple merit: Robust earnings, expanding multiples, and a currency that stayed supportive.
The year had one major scare. On April 2, the US announced “Liberation Day” tariffs. The Nikkei fell 13% immediately, matching Europe’s decline. Bears argued that Japan, an export powerhouse, was finished.
They were wrong. Japan erased those losses in just 14 trading days, faster than the US, Europe, or the UK.
You cannot build AI data centers or EVs without Japanese components. Japan exports critical infrastructure, not just consumer goods.
Also, compared to other nations with rampant inflation, it became a tailwind in Japan. Core CPI hovered near 2.8%–3.0%. In the past, deflation caused companies to hoard cash. Now, inflation forces them to spend it.
Households are moving quadrillions of yen from bank accounts into the stock market via NISA accounts. Cash is trash when inflation is 3%. Assets are the only hedge.
Part II: The Sanae Takaichi Shock
Markets usually hate political chaos. But the rise of Prime Minister Sanae Takaichi in late 2025, after years of in-fighting within Japan’s biggest political party, the Liberal Democratic Party, was a massive buy signal.
Takaichi became Japan’s first female Prime Minister in October. The market surged to records immediately. Investors love “Sanaenomics.” Her approval ratings remain high (around 60-70%), giving her the capital to push bold policies.
Sanaenomics is Abenomics with a harder edge:
Fiscal Expansion: Takaichi is ignoring fiscal hawks. She approved a ¥21 trillion stimulus package.
Strategic Investment: The state is pouring money into national security sectors: Japanese Chips, defense, and AI companies are expected to get massive government checks.
Monetary Ambiguity: She openly opposes premature rate hikes, keeping the Bank of Japan (BoJ) cautious and the yen weak.
Critics worry about the debt. Equity investors don’t care. The “Takaichi Put” means the government will support growth at all costs.
Part III: Japanese Companies ❤️ Shareholders
Japanese companies finally started working for shareholders, not just stakeholders.
In 2024, the Tokyo Stock Exchange started shaming companies trading below book value (read more here). It has finally started working
Insurers Sold: The big non-life insurers dumped over ¥1.5 trillion in cross-shareholdings.
Toyota Moved: Even Toyota unwound cross-holdings to fund EV investments.
The “poison pill” of Japanese capitalism, companies owning each other to block outsiders, is dissolving.
Japanese companies are notorious for hoarding cash. In 2025, they finally started using that cash to buy their own stock. Share buybacks in 2025 approached ¥30 trillion, shattering the 2024 record.
Mitsui & Co. bought back nearly 6%.
MUFG announced a record ¥500 billion buyback.
This is mechanical leverage. Buying back stock boosts EPS even if profits are flat. In 2025, profits weren’t flat, so stocks flew.
Part IV: The Buffett Effect
Warren Buffett’s stamp of approval remains the gold standard.
Rumors that Berkshire Hathaway would sell were wrong. They bought more:
Berkshire issued more yen debt to fund investments.
They confirmed they will hold the five trading houses (Mitsubishi, Mitsui, Itochu, Marubeni, Sumitomo) for “10 to 20 years.”
Buffett sees what we see: Cash machines trading at low valuations, paying growing dividends.
Global funds realized being underweight Japan was a career risk. BlackRock saw record inflows. Investors also rotated out of China, using Japan as the stable proxy for Asian growth.
Part V: The Yen & The BoJ
The Bank of Japan raised rates, but the yen didn’t care.
In December, the BoJ raised rates to 0.75%, a 30-year high.
Theoretically, this should have hampered the Yen fall, but the Yen stayed weak, around 156 to the Dollar.
Why? Real rates (nominal rates minus inflation) are still negative. The market bets Takaichi won’t let the BoJ tighten fast enough to kill growth.
This is the perfect setup:
Rates Up: Banks earn more on lending. The mega-banks (MUFG, SMFG) are finally profitable growth stocks.
Yen Down: Exporters like Toyota and Nintendo book massive windfall profits.
Part VI: Sector Watch The Engines
The rally was broad, but three sectors led the charge.
1. Semiconductors: The Supply Chain
AI needs Japan. You can’t make chips without Japanese gear.
Advantest: Up 114%. It has a near-monopoly on testers for NVIDIA chips.
Kioxia: Surged sixfold after listing.
2. Banks: Finally Investable
After 20 years of dead money, banks are back. The move to 0.75% rates expands margins. They are cheap compared to US peers and are buying back huge amounts of stock.
3. Defense: The Takaichi Trade
Japan is re-arming. Takaichi pledged to double defense spending.
Mitsubishi Heavy Industries is the prime beneficiary.
Defense is now a portfolio hedge against geopolitical risk.
Part VII: The Consumer Wakes Up
Wages are finally rising. Nominal wages rose 2.6% late in the year. Unions are demanding 5% hikes for 2026.
If households spend these gains, the rally expands from exporters to domestic retailers. We are seeing early signs of this shift.
Outlook 2026 – The Road to 55,000
Is the party over? Unlikely.
The Targets
Bank of America: Targets Nikkei 55,500.
IG: Targets 52,000.
Valuations are higher (P/E ~22x), but earnings growth is accelerating.
The Risks
Bond Vigilantes: If yields spike above 3%, government debt service becomes a crisis.
US Recession: Japan is cyclical. If the US hard lands, Japan falls.
Yen Reversal: A rapid strengthening of the yen (to 120) would crush exporter profits.
Conclusion
The Lost Decades are history. Japan has transformed from a value trap into a value creation machine. The government wants growth, companies are rewarding shareholders, and the central bank is supportive.
Closing above 50,000 is just the foundation. The horse is awake.
Rating: Overweight Japan