The second quarter of 2025 was marked by heightened volatility and geopolitical friction, yet also offered compelling opportunities across Japan’s equity landscape. Below is a thematic overview of Q2, incorporating key news developments and market-moving trends.
We also hosted a webinar in April in collaboration with Nomura Asset Management, providing insights into the macroeconomic environment.Watch the replay here!
Trump Tariffs Rattle Asia-Pacific Equities
The year’s second quarter began with turmoil as U.S. President Donald Trump announced sweeping tariffs on Chinese and broader Asia-Pacific imports. On 4 Apr, Asian equity markets, including Japan’s Nikkei 225, slumped on concerns that escalating trade frictions would dampen exports and hurt corporate earnings. Stocks continued to fall on 7 Apr, as markets priced in more aggressive protectionist measures.
However, by 8 Apr, a temporary pause in Trump’s tariff escalation allowed equities to rebound sharply, with the Nikkei 225 surging nearly 6%. This brief relief rally reflected investor optimism that the worst of the trade tension had been priced in, though caution remained.
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Market Performance & Economic Indicators
- Nikkei 225: As of 30 May, the Nikkei 225 stood at ¥37,965.10, reflecting a decrease of approximately 5.69% since the beginning of the year.
- Inflation: Japan’s core inflation rate reached 3.6% in May 2025, marking the highest level since January 2023. This surge is primarily driven by a 93.2% year-on-year increase in rice prices and a 6.9% rise in non-fresh food prices.
- Bank of Japan (BOJ) Policy: The Bank of Japan kept rates steady at 0.5% in April and May, citing global uncertainty and weak wage growth. Governor Ueda warned of rising food costs potentially pushing inflation above 2%. The next policy decision is set for 17 Jun.
- Yen Exchange Rate: The Yen’s resilience at ¥144.44 reflects a tug-of-war between bearish fundamentals (debt, yield concerns, rate differentials) and supportive factors (policy credibility, U.S. dollar weakness, and BOJ signals).
- Looking Ahead: If inflation persists and the BOJ takes even incremental steps toward normalisation, especially in H2 2025, the Yen may find further support, although major appreciation would likely be capped unless global rate dynamics shift more significantly.
Sector Highlights and Corporate Developments
Technology & Semiconductors
SoftBank Group (9984.JP) announced a US $6.5 billion acquisition of the US-based chip designer Ampere Computing. Ampere’s energy-efficient ARM-based processors cater to AI and cloud computing workloads, aligning with Japan’s strategic interest in advanced chip technologies.
Tokyo Electron (8035.JP) saw an 18% rise in equipment orders, driven by robust demand for AI and 5G production capacity. The company remains a critical supplier in the global semiconductor supply chain.
Renesas Electronics (6723.JP) acquired Sequans Communications, a leader in cellular IoT chips, strengthening its 5G and edge connectivity portfolio.
Why it matters:
These developments reflect Japan’s strategic push to regain leadership in semiconductors, with SoftBank advancing AI chip innovation and strong momentum from Tokyo Electron and Renesas in 5G and chip demand, positioning Japan to capitalise on the next wave of digital transformation.
Financials & Insurance
Mitsubishi UFJ Financial Group (8306.JP) posted record quarterly profits, boosted by improved lending margins and currency gains from a weaker Yen. The results mark a potential inflection point after years of margin compression under ultra-low rates.
Dai-ichi Life Holdings (8750.JP) acquired a £550 million stake in UK-based asset manager M&G. The move underscores a strategic push to diversify earnings and gain international exposure amid Japan’s aging demographic and saturated insurance market.
Why it matters:
MUFG’s record profits mark a potential shift for Japan’s financial sector, long constrained by low interest rates, while stronger bank earnings may ease pressure on the BOJ’s ultra-loose policies. Dai-ichi Life’s overseas expansion highlights insurers’ move to diversify beyond Japan. Together, these trends signal broader structural changes in response to evolving global conditions.
Automotive & EVs
Honda (7267.JP) reported a 42% year-on-year profit decline, citing high EV development costs and sluggish demand.
Toyota (7203.JP) committed ¥1.2 trillion to develop solid-state batteries, targeting mass production by 2027. These next-gen batteries offer higher energy density and faster charging, potentially transforming EV economics and consumer adoption.
Why it matters:
Honda’s profit decline underscores the financial strain legacy automakers face amid the EV transition, while Toyota’s major investment in solid-state batteries signals a bold bet on next-gen technology that could reshape the industry and secure a long-term competitive edge.
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Q3 2025 Outlook: What to Watch
As Japan enters Q3 2025, several factors will shape the equity market’s direction:
- BOJ Policy Signals
- Trade Friction
- Tech & Innovation Momentum
- Currency Watch
- Earnings Season Cues
The central bank’s June meeting will be critical. Markets will watch closely for changes to interest rate guidance or asset purchases, especially if inflation stays above the 2% target. A gradual normalisation path could support the Yen but may weigh on rate-sensitive sectors.
The risk of renewed US tariffs remains a key overhang. Export-driven sectors—autos, machinery, and technology—may remain sensitive to trade headlines. Any escalation or resolution could trigger rapid sentiment shifts.
The AI boom and semiconductor buildout show no signs of slowing. Japan’s aggressive push via corporate investments (SoftBank, Tokyo Electron, Renesas) positions it favourably. Q3 may bring more M&A activity and further gains in tech-heavy indices.
If US inflation data cools and the BOJ signals policy shifts, the Yen may appreciate further. A stronger yen would ease import costs but could pressure exporters, making forex dynamics a key macro pivot.
As Q2 earnings roll in throughout July, investor focus will be on margin resilience, cost management, and capital allocation. Sectors such as insurance, machinery, and tech may deliver solid results, while consumer and auto names could remain mixed.
Conclusion
Despite external headwinds and policy uncertainty, Japan’s corporate sector is demonstrating agility and strategic clarity. With foundational shifts underway in technology, finance, and mobility, Q3 may offer opportunities for investors aligned with Japan’s long-term transformation. The balance of monetary caution and structural innovation will remain central to performance in the months ahead.
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References:
- [1] BOJ’s Ueda calls for vigilance over food inflation risks | Reuters https://equalsmoney.com/economic-calendar/events/boj-interest-rate-decision
- [3] https://group.softbank/en/news/press/20250320
- [4] https://www.reuters.com/world/middle-east/yen-drifts-ahead-japan-bond-auction-dollar-steady-2025-05-28/
- [5] https://www.tipranks.com/news/company-announcements/mitsubishi-ufj-reports-record-profits-amid-challenges
- [6] https://asia.nikkei.com/Business/Business-deals/Japan-s-Dai-ichi-Life-to-acquire-15-stake-in-British-insurer-M-G
- [7] https://www.channelnewsasia.com/east-asia/honda-forecasts-70-cent-net-profit-drop-tariff-impact-5126336
- [8] Tokyo Electron Sales Surge 41% on AI Chip Equipment Demand | JAKOTA News
- [9] Renesas to Acquire Cellular IoT Technology Leader Sequans Through Tender Offer
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