The investment logic behind the Nikkei surpassing a 33-year high: An in-depth analysis of which Japanese stocks are worth paying attention to

Nikkei 225 index stood at 40,487 points at the end of June, approaching a one-year high. This rebound is not accidental but reflects the market’s renewed recognition of Japanese corporate value. Let’s break down: How did this rally in Japanese stocks come about? How long can it last? Which Japanese companies are truly worth paying attention to?

The Deep Logic Behind the Japanese Stock Rebound: From Neglect to Rediscovery

Regarding the recent movement of the Nikkei 225, there are actually several forces driving it.

First is valuation re-evaluation. During the global tariff panic in April, the P/E ratio of the Nikkei fell to 12 times, making it the cheapest among major international markets. As the market gradually digested pessimistic expectations, the P/E ratio rose back to 13 times, and this process itself fueled the index’s rebound.

Second is the reflow of funds. Currently, there is a prevailing atmosphere of “reducing holdings in US stocks,” with a large amount of overseas capital adjusting asset allocations. Because Japanese stocks are relatively cheap in valuation, they have become a new target for international capital seeking opportunities. This is not just a technical rebound; the corporate governance reforms promoted by the Tokyo Stock Exchange are showing tangible results, with more companies increasing dividends and implementing share buybacks, leading to substantive improvements in fundamentals.

Additionally, the recovery of the industrial chain. The global tech industry’s rebound has boosted the performance of Japanese semiconductor and precision equipment stocks, with market confidence in these sectors clearly rising.

However, whether this rally can continue depends crucially on the monetary policy stance of the Bank of Japan and whether global investors’ risk appetite will reverse.

It’s worth noting that Warren Buffett has been increasing his holdings in Japan’s five major trading companies (Mitsubishi, Mitsui, Itochu, Sumitomo, Marubeni) since 2019, and in June this year, he further added to these positions. Interestingly, he publicly stated at the Berkshire Hathaway annual meeting that he would “hold these stocks for 50 years,” demonstrating his deep confidence in the long-term value of Japanese companies.

Japanese Quality Companies Favored by the Market

Keyence (6861.JP): Steady performance of an invisible champion

Keyence is considered an “invisible champion” in industrial automation. Although ordinary people may not be very familiar with it, it is ubiquitous in the global smart factory field. Since its founding in 1974, the company has adhered to a “design-oriented” strategy, developing high-value-added products such as industrial sensors, vision systems, and laser marking equipment. While it does not manufacture itself, through a global direct sales network, its products are available in 46 countries and regions.

Financially, Keyence continues to grow steadily. For fiscal year 2024, revenue reached 1.059 trillion yen, operating profit was 549.78 billion yen, and net profit was as high as 398.66 billion yen. Wall Street analysts’ 12-month target prices average around 74,282 yen, with a high of 80,075 yen, offering about 30% potential upside from the current price of 56,800 yen.

Tokyo Electron (8035.JP): Explosive performance in semiconductor equipment

Tokyo Electron is a key supplier in the global semiconductor equipment industry, with a market cap of 12.6 trillion yen. It supplies critical equipment such as wafer cleaning and deposition to industry giants like Samsung, TSMC, and Intel.

The performance in fiscal year 2024 was particularly impressive: consolidated revenue reached 2.43 trillion yen, up 32.8% year-over-year. Overseas sales grew faster, increasing 36.2% to 2.24 trillion yen, accounting for 92.2%. More importantly, gross profit grew 38.1% to 1.15 trillion yen, with gross margin rising to 47.1%. Operating profit surged 52.8% to 697.32 billion yen, with earnings per share jumping from 783.8 yen to 1,182.4 yen. Market analysts maintain a positive outlook, with a target price set at 32,000 yen.

Mitsubishi Heavy Industries (7011.JP): A century-old industrial company driven by defense demand

Mitsubishi Heavy Industries, a representative Japanese industrial enterprise, dates back to 1884. Starting from shipbuilding and heavy machinery, it has developed into a comprehensive industrial giant covering aerospace, energy equipment, industrial machinery, and more.

Currently, with strong defense demand, the company estimates that operating profit for fiscal years 2025-26 will grow 9.6% to 420 billion yen. The aerospace and defense segment sees the largest increase, up 40%; energy systems are also expected to grow by 17%. Analysts’ 12-month target price averages 3,743.76 yen, with a high of 4,100 yen, representing about 17.54% upside from the current price of 3,185 yen.

Nintendo (7974.JP): Investment opportunity during transformation

Nintendo’s performance in fiscal year 2024 was not very promising: revenue declined 30.3% to 1.16 trillion yen, and operating profit plummeted 46.6% to 282.5 billion yen. The main reason is that the Switch console has entered the late stage of its lifecycle, and the upcoming Nintendo Switch 2 further dampens purchase enthusiasm.

However, this presents an opportunity for investors to reassess. Market analysis suggests that the post-pandemic slowdown has been digested, and gaming stocks are re-emerging in value. The gaming industry’s growth rate surpasses global GDP, driven by an expanding player base and diversified monetization models. Eleven Wall Street analysts’ average 12-month target price for Nintendo is 14,035.27 yen, with a high of 20,780 yen.

Sony Group (6758.JP): Profitability shift in content ecosystem

Sony’s latest quarter net profit increased by 4.6% year-over-year to 197.7 billion yen, but estimates for the new fiscal year project a 13% decline, mainly due to US tariff policies.

Interestingly, Sony’s growth is driven by its music and film businesses. Acquisitions of game studios Bungie, anime platform Crunchyroll, and collaborations with Kadokawa Group to develop IP derivatives are turning into profits. PS5 sales are revised downward from 18.5 million units to 15 million, reflecting adjustments in hardware market expectations. Sony has already taken measures to address tariff pressures, including diversifying production bases and adjusting pricing strategies. Nine Wall Street analysts’ average 12-month target price is 4,389.49 yen, about 21.69% higher than the current price of 3,607 yen.

Mitsubishi Corporation (8058.JP): Resilience of trading companies

As one of Japan’s five major trading companies, Mitsubishi Corporation is also a favorite of Buffett. By June 2025, Buffett’s company will increase its holdings in all five trading giants by 1.0%-1.7%, with ownership reaching 8.5%-9.8%. Buffett hinted that he plans to continue increasing his stake, possibly exceeding 9.9%.

For fiscal year 2025 (ending March 31), Mitsubishi’s performance shows that although revenue declined 4.9% to 18.6 trillion yen, pre-tax profit grew against the trend by 2.3% to 1.4 trillion yen, with net profit attributable to owners of the parent reaching 950.7 billion yen. This demonstrates the considerable resilience of Japanese general trading companies during economic downturns. However, current stock prices are somewhat high, so it might be better to wait for a correction to a reasonable level before considering entry.

Hitachi (6501.JP): From hardware manufacturing to digital services transformation

With a history of 111 years, Hitachi Group is undergoing an aggressive transformation. Recently, it acquired US digital services company GlobalLogic for $9.6 billion, fully shifting towards software services. Although it has exited most consumer electronics markets, it retains heavy machinery businesses such as rail transit equipment and automotive parts, while vigorously pursuing industrial digitalization services.

Although its stock price plunged in April due to tariff policies, it quickly rebounded and is now near a 20-year high. Scholars comment that Hitachi’s asset restructuring is a “Hitachi shock” to conservative Japanese companies. Its shift from an electrical manufacturer to an infrastructure data solutions provider is a model of corporate transformation. The company’s advantage lies in a clear transformation strategy and strong execution, and its stock performance over recent years has proven market recognition of its transformation.

Practical Considerations for Investing in Japanese Stocks

From an investment perspective, there are two opportunities currently in Japanese stocks.

Short-term volatility opportunities still exist. The recent movement of the Nikkei has been mainly influenced by trade policies. While tariff reductions may trigger a rebound, the global economic slowdown and weak Japanese export performance suggest the index will likely fluctuate between 37,000 and 38,000 points. Many market participants warn that current foreign capital inflows are mainly playing valuation arbitrage, and how long this hot money can sustain is uncertain.

Medium- to long-term outlook depends on 2026 and beyond. The potential turning point is the monetary policy shift of the Bank of Japan. If the BOJ resumes rate hikes, financial stocks could see valuation improvements, and yen normalization could enhance corporate profitability. But the key remains whether the BOJ’s rate hike pace can align with the global economic situation.

For the Nikkei to continue rising or even break new highs, several positive factors need to develop simultaneously: corporate governance reforms leading to sustained ROE improvements, emerging industry competitiveness, and substantial progress in Japan-US trade relations. Currently, these conditions are not fully in place, which explains the market’s divided outlook on future trends.

Channels for Investing in Japanese Stocks

Those interested in participating in the Japanese stock market have a few basic approaches.

Direct investment in the Nikkei 225 index is the most straightforward method. The Nikkei 225 covers 225 of the most high-quality listed companies in Japan, including many well-known Japanese firms. In the first half of this year, it fell to 31,136 points amid tariff fears, then rebounded strongly on valuation recovery, fund flows, and fundamental improvements. While it’s uncertain whether this rebound will continue, Japanese stocks have at least shaken off excessive caution and can be considered as an asset allocation option.

Picking individual stocks requires more research. The companies introduced above each have their own investment logic and market support. The key is to align choices with your risk appetite and investment horizon.

Regardless of the approach, the current Japanese stock market is indeed worth attention, but investors should also be aware of the risks—this is not a market that only goes up.