Japan’s equity market is heading into 2026 with investors betting on another round of strong gains, thanks to Prime Minister Takaichi Sanae’s aggressive government spending and strict approach to AI industry oversight.
The Topix index is finishing 2025 with a 23% rally, despite taking hits from trade tariffs, two Bank of Japan rate hikes, and a full change in political leadership.
This year’s rally has already pushed Japan past the S&P 500 in relative performance for the first time since 2022.
Takaichi’s administration is funneling trillions of yen into domestic programs, with traders eyeing upside in infrastructure, construction, and energy names. Robot manufacturers are also getting attention, as the tech spotlight turns away from virtual AI toward robotics and hardware.
Banks, which already had a strong 2025 due to higher interest rates, are expected to build on their gains.
Takaichi’s cabinet approves ¥112 trillion fiscal package
Takaichi’s fiscal package, unveiled in November, includes ¥18 trillion, or about $115 billion, in additional stimulus focused on 17 government-backed sectors, such as nuclear fusion and quantum computing.
On top of the stimulus, the government approved a record ¥112 trillion ($785 billion) budget for the next fiscal year. While that’s expected to help hold up consumer spending, it also increases the strain on the country’s massive public debt.
But the focus in the markets is on the cash hitting the real economy. Japan’s policymakers are using this funding to try and take the lead in technologies that are still up for grabs globally.
Inflation numbers coming out of Tokyo are giving the BOJ more cover to tighten policy.
The core consumer price index, which excludes fresh food, rose 2.3% in December. That’s down from 2.8% in November and also lower than economists expected.
A second inflation gauge, the one the BOJ tracks most closely, removing both fuel and food, showed a 2.6% increase in December. That also eased from the prior month.
The BOJ’s next policy meeting is scheduled for January 22–23, where members will update their growth and inflation projections. Just last week, the bank raised its main interest rate to 0.75%, the highest in 30 years.
Ueda Kazuo, the bank’s governor, told reporters on Thursday that they are seeing “steady progress” in trying to meet the 2% inflation goal, with wage growth now backing that effort. “We’re making steady progress in durably achieving our price target,” Ueda said.
Weaker yen benefits exporters while risks build at the edge
The yen is finishing 2025 much weaker than predicted, giving a big lift to exporters like car companies and commodity traders. As of December 25, the yen has only climbed less than 1% against the dollar year-to-date.
This is giving companies that sell abroad higher profits when their dollars come back home. Naoya Oshikubo, senior economist at Mitsubishi UFJ Trust, said the yen is likely to stay around the 150–160 range in 2026. “The BOJ’s hikes don’t really impact the yen, as the market has already priced in two hikes a year,” he said.
That view has been widely echoed among large-cap investors, who expect export-heavy sectors to keep beating the broader market next year. But not everyone is optimistic. Rie Nishihara, a strategist at JPMorgan, warned that if the yen slips too far, the boost turns into a threat. “Excessive yen depreciation” could hurt real income growth, she said, adding that 165 per dollar is the red line where it starts causing damage.
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