Japanese Stock Market Outlook

Japanese stock markets are expected to benefit from an improving local economy in the coming years, according to UBS analysts. However, they still foresee trade-related headwinds stemming from increased U.S. tariffs.

UBS predicts the Nikkei 225 benchmark will end 2025 at 41,500 points, while the TOPIX is expected to close next year at 2,900 points, indicating a roughly 5% upside from current levels, though slightly lower than earlier forecasts.

The analysts highlighted that heightened U.S. tariffs under President-elect Donald Trump may adversely affect Japanese companies, especially those reliant on exports.

Conversely, UBS anticipates Japan’s economy will demonstrate nominal growth amid sustained inflation and increasing wage hikes. They noted that planned corporate governance reforms could boost shareholder returns and enhance overall value.

Nevertheless, UBS cautioned that a tariff-heavy environment could complicate efforts to avoid a recession, advising investments in sectors aligned with domestic demand.

Japanese Domestic Sectors to Improve in Coming Years

UBS forecasts the Bank of Japan will raise its policy rate to 1% by end-2025, driven by improving wage hikes and sustained inflation, which should significantly benefit private consumption.

The analysts are optimistic about consumption-related sectors, such as retail and food, which have underperformed in the Japan stock market over the past two years, expecting recovery momentum to grow alongside rising real wages.

They also recommend investing in sectors like housing, real estate, IT services, and telecommunications due to their local demand exposure.

However, UBS pointed out that political instability could pose downside risks, particularly after the ruling Liberal Democratic Party's coalition failed to secure a majority in recent general elections.