The truth behind the Nikkei 225 hitting a 33-year high: Can the Japanese stock market continue its rally? 【Complete Guide to Investing in Japan】

From Sharp Decline to Rebound — What Has Happened in the Japanese Stock Market?

In the first half of 2025, the Japanese stock market experienced a “V-shaped” reversal. It first fell to around 31,136 points in April, hitting a new low in over a year, then rebounded strongly driven by valuation recovery, adjustments in global capital flows, and improvements in fundamentals. By the end of June, the Nikkei 225 Index successfully broke through the 40,000 mark, reaching a high of 40,487 points, hitting a nearly 33-year high.

The logic behind this rally warrants in-depth reflection. The market’s shift primarily stems from a reassessment of Japanese corporate value. When Trump announced tariffs in April, global investors panicked, and the Nikkei’s P/E ratio briefly fell to 12 times, making it the most undervalued among major developed markets. As investors realized that previous concerns about economic outlook were overly pessimistic, the P/E ratio gradually recovered to around 13 times, with valuation reassessment becoming the core driver of this rebound.

Meanwhile, international capital is undergoing large-scale asset allocation adjustments. The wave of reducing holdings in U.S. stocks is growing, and a large amount of overseas funds are flowing into Japanese stocks due to their relatively cheap prices. But this is not just a technical rebound; reforms in corporate governance implemented by the Tokyo Stock Exchange have encouraged more companies to increase dividends and implement share buyback plans, leading to tangible improvements in fundamentals.

The recovery of the global technology supply chain should not be overlooked either. Semiconductor and precision equipment stocks gained support, boosting market confidence in a bullish trend.

Can the Subsequent Market Continue? Key Factors to Watch

The continuation of the trend depends mainly on the monetary policy direction of the Bank of Japan. Currently, the BOJ maintains an accommodative stance, but the market is closely watching for signals of future policy adjustments. Once the BOJ begins a rate hike cycle, valuations of financial stocks will face new opportunities, and yen normalization could enhance corporate profitability.

In the short term, the performance of the Japanese stock market mainly depends on the direction of global trade policies. Even if tariffs are somewhat reduced, the current slowdown in the global economy and Japan’s relatively weak export momentum make a significant change unlikely. Market participants generally expect the Nikkei to fluctuate between 37,000 and 38,000 points. It is important to note that current foreign capital inflows are mainly driven by valuation arbitrage, and the sustainability of this hot money remains uncertain.

In the long term, for the Nikkei to continue breaking through and reaching new highs, several positive factors need to develop simultaneously—ongoing corporate governance reforms improving ROE, the gradual formation of emerging industry competitiveness, and substantial progress in US-Japan trade relations. From the current situation, these conditions still require time to mature.

Buffett’s Signal: Five Major Trading Companies Worth Watching

Warren Buffett’s investment moves often reflect the true thoughts of market institutions. Since first investing in Japan’s five major trading companies (Mitsubishi Corporation, Mitsui & Co., Itochu Corporation, Sumitomo Corporation, Marubeni) in 2019, Buffett’s Berkshire Hathaway has increased holdings again in June this year. At the Berkshire annual shareholder meeting, Buffett unprecedentedly declared that he would “never sell” these stocks for fifty years, demonstrating strong confidence in their long-term value.

The main reasons Buffett favors these Japanese trading companies include their outstanding capital efficiency, excellent management, and strong focus on shareholder interests. These companies hold or have stakes in numerous energy, resource, and infrastructure projects worldwide, with substantial strength.

In-Depth Analysis of Seven High-Quality Japanese Stocks

Keyence (6861.JP) — Hidden Champion in Industrial Automation

Keyence is a leader in industrial automation, founded in 1974. The company adheres to a “design-oriented” philosophy, focusing on developing high-value-added sensors, vision systems, laser marking equipment, and industrial measurement instruments. Its global direct sales network covers 46 countries and regions.

Its products span three major fields: industrial automation (sensors, barcode readers), precision measurement (digital microscopes, measuring instruments), and process control (laser processing equipment), widely used in high-end manufacturing sectors such as semiconductors, automotive, and biopharmaceuticals.

In fiscal year 2024, performance remained robust: revenue of 1.059 trillion yen, operating profit of 549.78 billion yen, and net profit of 398.66 billion yen. Wall Street analysts’ 12-month average target price is 74,282.41 yen, with a high of 80,075.16 yen. Compared to the current price of 56,800 yen, the upside potential is about 30%, making it a noteworthy Japanese investment target.

Tokyo Electron (8035.JP) — Semiconductor Equipment Leader

Tokyo Electron is a key supplier in the global semiconductor supply chain, with a market capitalization of 12.6 trillion yen. The company supplies critical process equipment such as wafer cleaning systems and deposition equipment to giants like Samsung and TSMC.

In fiscal year 2024, its performance was outstanding: consolidated revenue of 2.43 trillion yen, up 32.8% year-over-year. Overseas sales grew rapidly to 2.24 trillion yen (up 36.2%), accounting for 92.2% of total revenue. Cost control was effective, with gross profit increasing 38.1% to 1.15 trillion yen, and gross margin rising to 47.1%. Operating profit surged 52.8% to 697.32 billion yen, and net profit after tax increased 49.5% to 544.13 billion yen.

Analysts remain optimistic, setting a target price of 32,000 yen, reflecting market confidence in its future performance.

Mitsubishi Heavy Industries (7011.JP) — Embodiment of Japan’s Industrial Heritage

Mitsubishi Heavy Industries is considered a “fossil of Japanese industry,” with a history dating back to the Mitsubishi Shipyard in 1884. It has developed into a comprehensive industrial group covering aerospace, energy equipment, industrial machinery, and other strategic sectors.

The latest outlook is optimistic: expected operating profit for fiscal year 2025-26 to grow 9.6% to 420 billion yen. Profits from aerospace and defense are projected to increase by 40%, and energy systems by 17%. The average 12-month target price from Wall Street analysts is 3,743.76 yen, with a high of 4,100 yen. Compared to the current price of 3,185 yen, the upside potential is about 17.54%.

Nintendo (7974.JP) — Disruptor in the Gaming Industry

Nintendo’s fiscal year 2024 results faced adjustments: revenue down 30.3% to 1.16 trillion yen, operating profit plunging 46.6% to 282.5 billion yen. This is due to the Switch console entering the late stage of its lifecycle, with upcoming next-generation consoles further dampening consumer demand. North America contributed 44.2% of revenue, Europe and Japan accounted for 24.5% and 23.6%, respectively.

However, industry analysts generally believe that the gaming industry is re-emerging as an investment opportunity. The sector’s growth continues to surpass global GDP growth, driven by expanding player bases and diversified monetization models (subscriptions, virtual items, seasonal content). The 12-month average target price from 11 Wall Street analysts is 14,035.27 yen, with a high of 20,780 yen.

Sony Group (6758.JP) — Reshaping the Content Ecosystem

Sony’s latest quarterly results show net profit up 4.6% year-over-year to 197.7 billion yen, but the new fiscal year’s net profit forecast has fallen 13%, mainly due to US tariff policies. The music and film content divisions have become profit engines, benefiting from acquisitions like game studio Bungie and anime platform Crunchyroll.

Hardware sales are under pressure, with PS5 sales forecast lowered from 18.5 million units to 15 million units. US tariffs are expected to eat into 100 billion yen of operating profit. Sony is taking measures such as diversifying manufacturing bases and adjusting pricing strategies to cope with challenges, demonstrating a “soft and hard” strategic approach—maintaining hardware sales while accelerating content service transformation.

The 12-month average target price from 9 Wall Street analysts is 4,389.49 yen, with a high of 4,910 yen. Compared to the current price of 3,607 yen, the upside potential is 21.69%.

Mitsubishi Corporation (8058.JP) — Leading Japanese Trading House

Mitsubishi Corporation is a key focus of Buffett. After Berkshire Hathaway increased holdings in June, the stake in the five major trading companies has reached 8.5% to 9.8%. Buffett has obtained Japanese approval to raise this to over 9.9%.

For fiscal year 2025 (ending March), performance shows revenue of 18.6 trillion yen (down 4.9% year-over-year), but pre-tax profit grew against the trend by 2.3% to 1.4 trillion yen. Net profit attributable to shareholders was 950.7 billion yen, a slight decline of 1.4%, demonstrating resilience of trading companies during economic downturns.

Current stock prices are relatively high; it is advisable for investors to wait for a correction to a reasonable level before entering. In the long term, supported by Buffett’s continued increased holdings, the investment value remains significant.

Hitachi (6501.JP) — Model of Industrial Transformation

Hitachi has a 111-year history. Recently, it invested $9.6 billion to acquire U.S. digital services company GlobalLogic, fully shifting toward software services. Founded in 1910, Hitai is known for aggressive M&A strategies, gradually exiting consumer electronics and selling stagnant businesses like power tools and chemicals.

Its strategic focus is clear: retain heavy machinery businesses such as rail transit and automotive parts, while vigorously promoting industrial digitalization services to help manufacturing clients transform digitally. Although tariffs caused a brief dip in April, the stock quickly rebounded to a 20-year high. UC San Diego professor Ulrike Schaede commented that Hitachi’s asset restructuring creates a “Hitachi Shock,” exemplifying corporate transformation from an electrical manufacturer to an infrastructure data solutions provider.

Hitachi’s advantage lies in its clear transformation strategy and strong execution, with recent stock performance fully reflecting market recognition of its transformation.

Investment Channels for Taiwanese Investors in Japan

Direct Investment in Japanese Stock Indexes

Investing in stock indexes is the most direct and efficient approach. Although the gains may be less than individual stocks, as long as the Japanese stock market as a whole rises, investors can secure the maximum certainty of returns. For those seeking stable income, index investing is the best choice.

The Nikkei 225 Index covers 225 of Japan’s top listed companies and is a barometer of the Japanese stock market. In the first half of this year, the index first declined then rebounded from 31,136 points to a high of 40,487 points, demonstrating a strong rebound trend. While it’s uncertain whether the rebound can continue, the Japanese stock market has at least shaken off excessive caution and is worth including in asset allocation.

Investing in Japanese Companies via U.S. Stock Channels

Many well-known Japanese companies have issued ADRs in the U.S., such as Toyota (TM.US), SoftBank (SFTBY.US), Sumitomo Mitsui (SMFG.US), Nintendo (NTDOY.US), etc. Investors can easily buy these stocks with a U.S. brokerage account, and trading is convenient. Their stock movements are generally synchronized with Japanese domestic stocks.

Taiwan Brokerage Re-Delegated Trading

Yuan Ta Securities and Fubon Securities can facilitate re-delegated trading of Japanese stocks. Although operations are relatively complex, with more restrictions and higher fees, they remain options for investors who need direct ownership of Japanese stocks. Specific procedures can be inquired with the respective broker’s customer service.

Mid-term Outlook for Japanese Investment

In the short term, fluctuations are expected to oscillate between 37,000 and 38,000 points, with attention to the inflow and outflow of hot money. The key variable in the medium term is the monetary policy shift of the Bank of Japan—if interest rate hikes commence, valuations of financial stocks could rebound, and corporate profitability will improve. To break through and reach new highs in the long term, multiple positive factors such as corporate governance reforms, industry competitiveness enhancement, and improvement in US-Japan trade relations need to align.

For Japanese investors, stocks with both defensive and growth potential are most suitable at this stage. Combining the medium-term upward trend of the Japanese stock market with the fundamental improvements of individual companies, selecting high-quality enterprises for investment can lead to promising returns.