Japanese Stock Market: Continued Sluggish Growth
2025-05-20
■ Stock prices might temporarily remain undervalued as they assess the extent of downward adjustments in corporate earnings forecasts.
■ In the short term, attention should focus on the progress of tariff negotiations and whether the exchange rate agreement is included on the agenda.
The Nikkei average shifted to a downward trend from the closing price of 38,027 yen on March 26, following US President Trump's announcement of a substantial 25% tariff on all imported cars. Subsequently, on April 2, the details of the mutual tariffs were revealed. Market concerns about the negative impact on the economy and corporate earnings led to a sell-off that affected a wide range of stocks, dropping from a closing price of 35,725 yen on that day to 30,792 yen on the 7th. Although the mutual tariffs officially took effect on the 9th, the later announcement of a 90-day suspension of additional tariffs resulted in a sharp market rebound. Following this, Trump denied the possibility of removing Federal Reserve Chairman Powell from his position. Moreover, market expectations for progress in Japan-US tariff negotiations and a reduction in concerns over escalating Sino-US trade frictions have restored investors' risk appetite. Additionally, the United States reached partial tariff reduction agreements with the United Kingdom on the 8th and with China on the 12th. As of May 13, the stock market rebounded to 38,494 yen.
Although stock prices have recovered to levels seen before the sharp decline due to tariffs, the outlook for economic performance and corporate earnings has likely diminished compared to prior to the tariff increase. According to summary data from financial information company LSEG I/B/E/S, as of last weekend, the expected earnings per share (EPS) growth rate for the TOPIX index for 2025 was 6.2%, down from 8.5% in late March. However, the expected price-to-earnings ratio (PER) during the same period did not decline significantly (from 13.8 times to 13.2 times), indicating that the sense of undervaluation has not notably increased. For an extended period, the TOPIX stock price level has generally been viewed as undervalued at 12-14 times and overvalued at 14-16 times. Given that the extent of the downward adjustments in corporate performance expectations has not yet been fully clarified, it's likely that stock prices may fluctuate within the undervalued range in the short term. Based on the current NT multiple (13.78 times), the Nikkei average undervaluation range is between 33,650 and 39,250 yen.
For companies with March as their fiscal year-end, performance forecasts for the March 2026 period have been largely announced, and TOPIX's combined net profit is expected to decrease year-on-year. Economically sensitive stocks, which are significantly impacted by US tariff policy, remain generally cautious. While China and the United States have reached an agreement on the withdrawal and substantial reduction of some tariffs, the progress of future trade negotiations remains a point of close attention. Additionally, it will be important to monitor whether the exchange rate issue will be discussed at the upcoming Japan-US Finance Ministers' meeting during the Group of Seven (G7) Finance Ministers and Central Bank Governors Meeting scheduled for the 20th to 22nd, and whether a consensus can be reached on mutual tariffs, automobiles, steel, aluminum, and other matters in the Japan-US trade negotiations. If no consensus is achieved, investors' risk tolerance may decline again, necessitating vigilance regarding the potential downside risk of stock prices in the short term.
■ In the short term, attention should focus on the progress of tariff negotiations and whether the exchange rate agreement is included on the agenda.
The Nikkei average shifted to a downward trend from the closing price of 38,027 yen on March 26, following US President Trump's announcement of a substantial 25% tariff on all imported cars. Subsequently, on April 2, the details of the mutual tariffs were revealed. Market concerns about the negative impact on the economy and corporate earnings led to a sell-off that affected a wide range of stocks, dropping from a closing price of 35,725 yen on that day to 30,792 yen on the 7th. Although the mutual tariffs officially took effect on the 9th, the later announcement of a 90-day suspension of additional tariffs resulted in a sharp market rebound. Following this, Trump denied the possibility of removing Federal Reserve Chairman Powell from his position. Moreover, market expectations for progress in Japan-US tariff negotiations and a reduction in concerns over escalating Sino-US trade frictions have restored investors' risk appetite. Additionally, the United States reached partial tariff reduction agreements with the United Kingdom on the 8th and with China on the 12th. As of May 13, the stock market rebounded to 38,494 yen.
Although stock prices have recovered to levels seen before the sharp decline due to tariffs, the outlook for economic performance and corporate earnings has likely diminished compared to prior to the tariff increase. According to summary data from financial information company LSEG I/B/E/S, as of last weekend, the expected earnings per share (EPS) growth rate for the TOPIX index for 2025 was 6.2%, down from 8.5% in late March. However, the expected price-to-earnings ratio (PER) during the same period did not decline significantly (from 13.8 times to 13.2 times), indicating that the sense of undervaluation has not notably increased. For an extended period, the TOPIX stock price level has generally been viewed as undervalued at 12-14 times and overvalued at 14-16 times. Given that the extent of the downward adjustments in corporate performance expectations has not yet been fully clarified, it's likely that stock prices may fluctuate within the undervalued range in the short term. Based on the current NT multiple (13.78 times), the Nikkei average undervaluation range is between 33,650 and 39,250 yen.
For companies with March as their fiscal year-end, performance forecasts for the March 2026 period have been largely announced, and TOPIX's combined net profit is expected to decrease year-on-year. Economically sensitive stocks, which are significantly impacted by US tariff policy, remain generally cautious. While China and the United States have reached an agreement on the withdrawal and substantial reduction of some tariffs, the progress of future trade negotiations remains a point of close attention. Additionally, it will be important to monitor whether the exchange rate issue will be discussed at the upcoming Japan-US Finance Ministers' meeting during the Group of Seven (G7) Finance Ministers and Central Bank Governors Meeting scheduled for the 20th to 22nd, and whether a consensus can be reached on mutual tariffs, automobiles, steel, aluminum, and other matters in the Japan-US trade negotiations. If no consensus is achieved, investors' risk tolerance may decline again, necessitating vigilance regarding the potential downside risk of stock prices in the short term.