Japanese equities continued their upward trajectory as the Nikkei 225 rose over 1% amid the Bank of Japan’s historic rate hike decision and positive sentiment around export-oriented sectors benefiting from yen weakness.

Market Performance

The Nikkei 225 closed at 39,568.06, gaining 438.21 points or 1.12% in the latest trading session. The benchmark index has shown resilience despite global market volatility, supported by strong corporate earnings and favorable currency dynamics.

Key Sector Performance

  • Automobiles: Toyota, Honda, and Nissan gained on yen weakness boosting export competitiveness
  • Technology: Semiconductor equipment makers rallied on AI demand
  • Banking: Financial stocks rose on higher interest rate expectations

BOJ Historic Rate Decision

The Bank of Japan raised its key policy rate by 25 basis points to 0.75% at its December 19, 2025 meeting, marking the highest interest rate level in nearly three decades. This decision underscores the BOJ’s continued shift toward policy normalization after decades of ultra-loose monetary policy.

Implications of Rate Hike

  • Banking sector benefits from improved net interest margins
  • Yen strengthening pressure against major currencies
  • Real estate financing costs expected to rise
  • Consumer loan rates to increase gradually

Corporate Earnings Highlights

Japanese corporations continue to report strong earnings, driven by:

  • Record profits in automotive sector despite EV transition challenges
  • Semiconductor equipment demand from global chipmakers
  • Tourism boom supporting services sector
  • Cost-cutting initiatives improving margins

Currency Dynamics

The Japanese yen has shown volatility against major currencies, with implications for exporters and importers:

  • Yen weakness benefiting export-oriented companies
  • Import costs remain elevated, affecting margins for domestic-focused firms
  • BOJ rate hike expected to provide gradual yen support

Foreign Investment Flows

Foreign investors have maintained interest in Japanese equities, attracted by:

  • Relatively attractive valuations compared to US markets
  • Corporate governance reforms improving shareholder returns
  • Strong dividend and buyback programs
  • Japan’s strategic importance in semiconductor supply chain

Key Stocks to Watch

Technology Leaders

  • Tokyo Electron: Benefiting from semiconductor capex cycle
  • Advantest: Testing equipment demand remains robust
  • SoftBank Group: AI investments driving valuation

Traditional Sectors

  • Toyota Motor: EV transition and hybrid strength
  • Mitsubishi UFJ: Banking sector beneficiary of rate hikes
  • Fast Retailing: Retail expansion continues

2026 Outlook

Analysts remain cautiously optimistic about Japanese equities in 2026:

  • Continued BOJ policy normalization expected
  • Corporate governance reforms to drive shareholder returns
  • AI and semiconductor themes to benefit key sectors
  • Tourism sector recovery fully priced in

Key risks include potential global economic slowdown, trade tensions, and currency volatility that could impact corporate earnings.