Japan Turns Inward as Tokyo Stocks Hit Surprise All-Time Highs
Japan’s stocks are setting records based on very different drivers than those propelling Wall Street.
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A day after Japan’s Nikkei 225 crossed the 43,000 mark for the very first time, Japanese and Asian markets are taking a breather.
So it’s no surprise to see Wall Street take a step back from its record levels, too. Asia led a slight selloff on Thursday, but we’ve also seen Tokyo stocks hit a new peak this week.
The reasons for the run up aren’t the same as on Wall Street, and may come as some surprise. In fact, it’s almost the opposite of what we’re seeing for U.S. equities.
Japanese equites have embarked on a catch-up rally, the poor performance of large exporters and Japanese chipmakers offset by the strong showing for domestic plays.
Bank Stocks Soar
The Nikkei 225 finished Wednesday at 43,274.67, its highest close on record. It touched 43,390 just after lunch on Wednesday to set an intraday record high for good measure. Bank stocks helped power those gains, with the largest, Mitsubishi UFJ Financial Group MUFG (T:8306), up 20.6% in 2025.
The Nikkei is back below that 43,000 level on Thursday, closing 1.5% lower at 42,649. The broad-market Topix also set a new all-time closing high of 3,091 on Wednesday before shedding 1.1% on Thursday.
Tech stocks in Japan, however, are lagging. It hurts that the country’s major chipmakers, Tokyo Electron TOELY (T:8035) and Renesas Electronics RNECY (T:6723) don’t have major U.S. operations or even expansion plans, as I’ve noted in my take on the winners and losers out of the potential 100% U.S. chip-import duty.
Meanwhile running-shoe and sportswear maker Asics ASCCY (T:7936) has seen its shares soar 34.7% so far this year. It has leapt again on strong earnings this week.
Entertainment conglomerate Sony SONY (T:6758) is up 23.3% so far this year, expanding its presence in anime, and taking a 2.5% stake in video game and anime publisher Bandai Namco NCBDY (T:7832), a symbolic partnership and investment into Bandai shares that are up 48.2% in 2025.
Currency Back in Play
Most of Japan’s recent rally has been a delayed gain for a market where currency gains tend to hurt major exporters. Domestic plays, on the other hand, are getting boosted by the slightly stronger yen, which reduces costs on any imported goods or parts.
A rate rise in Japan would further stimulate the yen. It’s also worth noting that Japan imports all its oil and much of its energy, input costs that would also sink on a stronger currency – and a weaker U.S. dollar.
Although U.S. stocks are moving higher on a likely interest-rate cut in September, that is driving the U.S. dollar lower, with Asian currencies gaining ground on the other side of the trade.
The yen is 0.4% stronger on Thursday, taking the Japanese currency to ¥146 to the U.S. dollar. It started this month at ¥151, and has gained 6.9% against the greenback since the start of the year.
“The current steep rise in Japanese equities can be seen simply as a correction in line with a global soft-landing scenario, and risk-on flows, but this is not quite consistent with the fact that domestic-related stocks are driving this,” Nomura macro strategist expert Naka Matsuzawa said in a note to clients.
Leadership Change to Come?
Investors may be positioning themselves for a change in leadership at the top. Unpopular Prime Minister Shigeru Ishiba has been under pressure since a disastrous showing in Upper House elections in July. That led to his Liberal Democratic Party losing its majority in both houses of Japan’s parliament, as I noted in my post-election analysis, when I predicted Ishiba wouldn’t last long.
He has persisted in office so far, to be fair. But he will likely face a leadership challenge and vote from within his party in a month or so. His successor, the stock moves show, may intensify the push to reflate Japan’s economy.
There may be buying on the rumor and selling on the news in Japan once a new prime minister takes office. Matsuzawa notes that Ishiba’s immediate predecessors Fumio Kishida and Yoshihide Suga have both voiced support for him, so even if Ishiba is ousted, their influence should ensure continuity in policy to push fiscal reform.
The central Bank of Japan (BOJ) recently released the thinking behind its last meeting, notes that are taking on a decidedly hawkish tone. The central bank may “exit from its current wait-and-see stance, perhaps as early as the end of this year,” that summary of opinions states.
BOJ and Fed: Odd Dance Partners
So, we have the BOJ and the Fed doing a dance about an interest-rate rise in Tokyo, and a cut in Washington, D.C. The market is currently pricing in a 57% probability of a Japan rate hike, and ultimately taking rates from 0.5% now to just shy of 1.0%, while we know markets are now pricing in a likely Fed rate cut in September.
There’s unusual political pressure on Japan, just as there is on the Fed. U.S. Treasury Secretary Scott Bessent took the highly unusual step of commenting on another country’s rate policy
“They’re behind the curve,” Bessent said in a Bloomberg interview. “So they’re going to be hiking, and they need to get their inflation problem under control.”
True, inflation in Japan is forecast at 3.3% as of July, above the central bank’s 2.0% target. But it is also true that it is already coming down from 4.0% in January. U.S. inflation is almost exactly the same, at 3.1% for July – but rising.
Japan is at odds with the general move in Asia to ease interest rates, in that the Bank of Japan’s next move will undoubtedly be to raise rates.
Rest of Asia in Cutting Mode
By contrast, the Australian central bank cut interest rates on Tuesday, and most regional peers are moving into easing mode.
The Reserve Bank of Australia trimmed benchmark lending rates by 25 basis points, to 3.6%, the lowest levels since April 2023. It is weaker economic growth prospects due to disruptions in international trade that are now dominating the conservation, with inflation largely at bay in Asia.
The RBA cut its growth forecast for Australia for the year to 1.7%, from 2.1%, citing weaker-than-expected consumer demand so far in 2025.
The central banks in China, India, South Korea, the Philippines, Thailand, Pakistan and Sri Lanka have already taken turns in cutting interest rates this year.
While inflation surged in Asia after the pandemic, those pressures have significantly eased. The Asian Development Bank noted, in a June blog post highlighting the room to cut rates, that inflation is at or below target levels for 13 of the 17 Asian nations that do set an inflation target.
Japan may therefore be virtually alone in pushing rates higher — small moves, sure, but supporting the domestic stocks pushing the Nikkei and Topix to new highs.
