Key Takeaways
- Japanese stocks saw their steepest monthly decline, led by a selloff in chip-related firms and concerns over Trump’s tariffs.
- Japan’s rising consumer inflation also sparked concerns, pushing the BOJ to act on rates.
- However, analysts are confident about the future positive trajectory of Japan’s largest index by market cap, Nikkei 225.
Japanese stocks saw their biggest monthly drop since 2022 , driven by a selloff in chip-related firms and fears over U.S. export tariffs. The Nikkei 225 and Topix Index both posted significant losses, with the Nikkei down nearly 3%.
Despite uncertainty around Japan’s economic health, analysts shared positive views over the short-term performance of the local stock market.
Worst Month in Two Years for Japanese Stocks
Japanese stocks recorded their steepest monthly decline since 2022 as a selloff in chip-related firms accelerated, compounded by growing concerns over the global impact of Trump’s tariffs.
Export-sensitive industries, including electronics, automobiles, non-ferrous metals, and shipping, saw broad declines.
An 8.5% drop in Nvidia shares weighed heavily on semiconductor and AI-related stocks in Japan, with DISCO Corp and Advantest Corp both plunging over 8%, making them the worst performers on the Nikkei 225 .
The TOPIX Index closed down 2% at 2,682.09, while the Nikkei fell 2.9% to 37,155.50, at one point dropping as much as 3.7%—its biggest intraday fall since September. Both indexes marked their largest monthly losses since December 2022.
Trump confirmed that 25% tariffs on Canada and Mexico would take effect on March 4, 2025, adding a 10% levy on Chinese imports.
The market had likely underestimated the scope of these tariffs, Kohei Onishi , senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities, said. They noted that the Nikkei’s slide below the 38,000 level underscores growing market uncertainty.
Japan Inflation Drives BOJ Speculation
Japan’s inflation peaked in January 2025, with core consumer prices rising 3.2% year-on-year, surpassing expectations and reinforcing concerns about persistent price pressures. Including fresh food, overall inflation hit 4.0%, the highest since June 2023.
Rising food and energy costs drove the increase, with cabbage prices nearly tripling due to extreme weather, rice surging over 70%, and electricity costs jumping 18%. Panic buying after a megaquake warning further strained food supplies.
The inflation surge has intensified speculation about when the Bank of Japan will raise interest rates as it gradually moves away from its ultra-loose monetary policy.
Traders currently price around 37 basis points of rate hikes for 2024. The first increase will possibly come in May, followed by another in October. However, markets remain cautious as policymakers signal a careful approach to any rate adjustments.
What to Expect
Nikkei 225 is forecast to rise 4.6% to 40,000 by the end of June and 42,500 by year-end, according to a Reuters poll of 19 equity strategists.
Concerns over U.S. President Donald Trump’s tariff policies have limited this year’s gains. However, analysts believe corporate outlooks will improve once uncertainties clear, driving further gains.
Daiwa Securities’ Yugo Tsuboi expects local firms to report record profits in the new fiscal year, which would push the Nikkei up 10% within three months.
However, potential U.S. tariffs on Japanese manufacturers, especially automakers with production hubs in Canada and Mexico, remain a key risk.
The BOJ interest rate policy is another major factor, with expectations of a hike from 0.50% to at least 0.75% this year. Strategists suggest once markets determine the peak rate, foreign investors will likely return, lifting the Nikkei further.
Analysts are divided on corporate earnings growth for 2025. Some predict stronger profits due to rising prices, while others warn of a slowdown as the yen strengthens. This could reduce overseas earnings for exporters.
The yen recently hit a 2.5-month high, a trend that could weigh on Japanese equities in the near term.
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