Japanese Stocks Have More Gas in Their Tanks

Japanese equities, having significantly outperformed the S&P 500 year-to-date and nearing all-time highs, are projected by Bank of America and other market observers to offer further upside through late 2025. This outlook is predicated on improving earnings revisions, particularly for the next fiscal year and potential upward guidance in Japan's upcoming fiscal H2, alongside the benefits of rising inflation and wage growth for consumer cyclicals. Such trends position vehicles like the Neuberger Berman Japan Equity ETF (NBJP) favorably, validating increased multiples with strong earnings growth.

Analysis

Japanese equities have demonstrated significant outperformance year-to-date, with the MSCI Japan Index beating the S&P 500 by 850 basis points and major domestic indexes like the Nikkei 225 and TOPIX nearing all-time highs. The forward-looking bull case, as articulated by Bank of America, is predicated on fundamental improvements, primarily a positive trend in corporate earnings revisions following a strong first quarter. This earnings growth is crucial as it provides justification for the recent expansion in valuation multiples. Key catalysts for further upside through late 2025 include expectations that TOPIX earnings per share (EPS) has bottomed and that the upcoming fiscal year will see a significant earnings recovery. A near-term catalyst is the start of Japan's fiscal second half next month, which may bring upward revisions to corporate guidance. Furthermore, a structural shift away from decades of deflation towards sustained inflation could drive wage growth, directly benefiting consumer-facing sectors. The Neuberger Berman Japan Equity ETF (NBJP), for example, is positioned to leverage this trend with a nearly 22% allocation to consumer cyclical stocks and a 9% exposure to technology, another area highlighted as a potential market driver via artificial intelligence.

Key Decisions for Investors

• Investors underweight in Japanese equities should consider increasing their allocation, as multiple catalysts, including improving earnings and potential guidance upgrades, suggest further upside beyond the initial rally.
• For targeted exposure, an actively managed fund like NBJP may be attractive due to its significant weight in consumer cyclicals (~22%), which is positioned to benefit directly from the macro theme of rising inflation and wage growth in Japan.
• Monitor corporate announcements as Japan enters its fiscal second half next month, as upward revisions to earnings guidance would serve as a key confirmation of the bullish thesis.
• While the outlook is positive, continued earnings growth is essential to validate expanded multiples; therefore, closely track TOPIX EPS forecast trends for the next fiscal year to ensure the fundamental story remains intact.