Japan’s H2 2025 Market Outlook: Navigating Uncertainty and Opportunity

H1 2025 Market Overview: Two Major Shocks

The first half experienced significant market turbulence. Specifically, two major shocks impacted global markets.

The “Deep Seek Shock” occurred early. China’s low-cost AI, Deep Seek, emerged. This led to a re-evaluation of generative AI stocks. Semiconductor-related stocks, in particular, saw steep declines.

Next, the “Tariff Shock” hit in April. President Trump unveiled detailed tariff plans. This revealed his serious intent. Consequently, global stock markets, including Japan’s, fell sharply. Investors worried about tariffs impacting the world economy. The Nikkei 225 dropped to 31,000 yen on April 7.

However, the market recovered afterward. President Trump’s “taco” approach calmed market fears. This indicates his concern for market stability. Policy adjustments gained momentum. As a result, market sentiment turned optimistic again. Stock prices recovered rapidly. The Nikkei 225 regained 40,000 yen by June 27. This was the first time in six months. Thus, the stock price returned to its year-start level.

Nikkei 225 Forecasts for Year-End

H1 saw unstable movements in the Nikkei 225. So, what are market participants’ year-end forecasts?

The year-end closing price is a key focus. Experts provided their predictions. The forecast range appears wide. It spans from 31,000 yen to 44,000 yen. However, over half of the responses concentrated. They clustered between 40,000 yen and 42,000 yen. The June 30 closing price was 40,487 yen. This might suggest limited upside potential. Nevertheless, looking at the forecast ranges, the outlook shifts.

Forex Market Trends and USD/JPY Outlook

Let’s also review the foreign exchange market.

The yen started at 157 JPY per dollar. This was at the beginning of the year. Subsequently, a dollar sell-off occurred. This reflected concerns about the US economy. Consequently, the yen strengthened significantly. It briefly reached 139 yen in April. This period coincided with March-ending corporate earnings. Many executives struggled to set their exchange rate assumptions.

Since then, USD/JPY fluctuated. The pair moved back and forth. Recently, it has stabilized somewhat. It trades between 143 yen and 145 yen.

Market participants forecast year-end USD/JPY. The median forecast is 144 yen. However, the range is remarkably wide. It stretches from 129 yen to 157 yen. This range is even wider than stock price forecasts. Many forecasts cluster around 140 yen and 145 yen. Yet, points are scattered across the board. Notably, many predict values in the 130s and 150s.

Divergent views on the FRB’s policy are key. These differing USD/JPY forecasts stem from varied interpretations. Market participants disagree on reading the Federal Reserve’s economic policy.

Key Investment Factors for H2

What are the top investment factors for H2?

US-related items dominate the top three. These are: FRB’s monetary policy, the US economy, and US tariff policy direction. This indicates a strong belief. H2 will largely depend on US trends.

The relationship between these three factors is crucial. It is vital for forecasting the H2 market. Intriguingly, military conflict between Iran and Israel. This item was scarcely chosen by respondents. It shows minimal market concern.

Interconnectedness of Key US Factors

Let’s explore the relationship among these three US factors.

First, tariff negotiation timing and content are critical. This outcome will significantly impact the global economy. It also affects Japanese corporate earnings. Some Japanese companies haven’t fully priced in tariff impacts. Depending on when negotiations conclude, more companies may revise earnings forecasts. Therefore, upcoming earnings reports bear close watching. This includes March-ending firms’ results later this month. Also, December-ending firms’ interim reports are key.

Next, will US tariffs trigger a recession? This remains a significant concern. Should the US economy slow down, the FRB is expected to cut interest rates.

However, inflation could hinder FRB action. Market participants widely expect tariff effects to translate to higher prices this summer. If inflation accelerates, rate cuts become challenging. Thus, the market will monitor the FRB closely. They will watch when and by how much rates move. This depends on both economic slowdown and inflation.

Therefore, H2 market volatility is expected. Examining year-end stock forecasts, sudden market shifts are possible. Caution remains necessary for the next six months.

Nikkei 225 Upper and Lower Range Forecasts

This chart summarizes expert Nikkei 225 forecasts. It shows year-end upper and lower price targets. The yellow bar length indicates the forecast range. Months like July mark expected timing for upper/lower limits. Asterisks plot the December-end forecast values.

Most forecasts lean towards year-end strength. The asterisk position often appears to the right. This means closer to the upper end. This suggests many expect year-end stock prices to be higher. Indeed, December was the most common month. It was predicted for hitting the upper limit.

However, the lower end of the range is notable. It might be hard to see, but observe the lower limit. Even with a right-leaning asterisk for year-end, the lower bound is 36,000 or 37,000 yen. Considering current stock levels, this implies a potential drop. A decline of 3,000 to 4,000 yen is possible. August and September were the most common months. They were predicted for hitting the lower limit.

Views of Year-End Stock Bulls and Bears

Let’s examine how “year-end stock bulls” and “non-bulls” view H2.

First, those expecting year-end stock highs. Many predict the lower range. This is often seen between July and September.

Nissay Asset Management’s Mr. Matsunami offers insight. He forecasts year-end stock gains. This is due to irreversible active investments. These investments aim for higher ROE. However, he notes potential downside risks. These include Trump tariffs harming the auto industry. Also, he points to political weakness.

Next, Pictet Japan’s Mr. Itoshima is optimistic. He forecasts year-end stock gains. This is based on US-China tariff negotiations progress. Also, US tax cuts and rate cuts support his view. However, he considers a negotiation stalemate until October. Therefore, he set the low point for November.

Furthermore, Invesco Asset Management’s Mr. Kinoshita contributes. He expects adverse effects from US tariffs. These impacts on economy and stocks will peak this summer. However, he predicts the US economy will bottom out by year-end. Japan’s robust domestic demand is also a factor. Thus, he forecasts a recovery to near record highs by year-end. These views suggest a strong underlying market.

Disclaimer: This content is for informational purposes only and does not constitute financial advice. Consult a qualified financial advisor before making investment decisions.