The Nikkei 225 Index Futures, traded in standard, mini, and micro contracts, is a derivative instrument based on Japan’s flagship equity benchmark, the Nikkei 225 Index. Its top three constituents by weight are Fast Retailing (Uniqlo), Tokyo Electron (semiconductor equipment), and Advantest (semiconductor testing solutions).
In May, Japanese equities rallied by 5.36 per cent in JPY terms, supported by the 90-day pause in US President Donald Trump’s reciprocal tariffs and the lowering of China tariffs from 145 per cent to 30 per cent. This easing of trade pressure supported Japan’s export-heavy companies and lifted market sentiment.
At the same time, soaring Japanese Government Bond (JGB) yields posed a threat to equities. Higher yields narrow the earnings-yield gap, eroding the equity risk premium and encouraging investors to rotate to the safety of bonds. They also tend to raise borrowing costs and squeeze corporate profitability, further weighing on Japanese companies.
On May 22, the 30-year JGB yield hit an all-time high of about 3 per cent, fuelled by expectations of Bank of Japan (BOJ) tightening and persistent inflationary pressures. Since then, yields have cooled, aided by the BOJ’s decision to leave policy rates unchanged and to taper bond purchases. This stance should help limit further spikes in funding costs, preserving the equity risk premium and lending near-term support to equities.
Additionally, a narrower-than-expected Q1 real GDP contraction reinforces the BOJ’s cautious path towards gradual policy normalisation, keeping a lid on JGB yields.
While macro headwinds remain, especially with the US being Japan’s largest export market, we believe there is material upside potential if bilateral negotiations progress and trade deals are inked. A key risk, however, lies in currency fluctuations, particularly a stronger yen. For example, Toyota estimates that every 1 yen move in USD/JPY shaves roughly 50 billion yen from operating profit.
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Looking ahead to 2H 2025, monetary policy, US fiscal and trade decisions, and geopolitics will dominate the global market narrative. Key milestones include the Jul 9 deadline for President Trump’s tariff review, Middle-East tensions, progress on the China-US trade dialogue, and the Fed’s rate path.
Despite these risk factors, we believe the structural bull case for Japan equities remains intact. Relative valuation is attractive, with the Nikkei 225 trading at an approximate 30 per cent discount to the S&P 500 and below its own five-year average multiple of 25.4x.
We expect uncertainty to linger through 2H 2025 but see room for multiple convergence as investors reallocate capital to non-US markets. Structural catalysts such as the AI narrative, corporate governance reform, cross-holding unwinds, rising inflows from the Nippon Individual Savings Account programme, and an unprecedented wave of shareholder activism continue to support multiple expansion. While near-term profit pressure may persist for exporters due to currency risk, these structural shifts are fostering a long-term re-rating environment.
Both the Tokyo Stock Exchange and the Japanese government are pressing companies to improve valuations. Tactics range from share buybacks to more unconventional efforts such as gift distributions at AGMs to cultivate retail-investor loyalty. Heightened shareholder activism is compelling management teams – long criticised for cash hoarding – to deliver credible growth strategies, fostering conditions for a sustained re-rating and long-term corporate performance in an increasingly uncertain business climate.
Nikkei 225 technical outlook
The daily chart of the Osaka Nikkei 225 Mini Futures shows the contract rebounding from its Apr 7 low of 30,650 and riding an ascending trend line that intersects the 50-day moving average (37,111). This moving average appears poised to cross above the 100-day moving average (37,200).
The latest close at 38,875, comfortably above 38,470, aligns with the 76.4 per cent Fibonacci extension drawn from the August 2024 low, January 2025 high, and April 2025 low.
Looking ahead, sustaining this breakout opens the door to 40,885 (100 per cent extension) and 43,300 (123.6 per cent). Immediate support lies at 36,975 (61.8 per cent), with a deeper floor at 35,710 (50 per cent).
Ultimately, we believe a temporary tariff détente, stabilising bond yields, and a constructive technical profile position the Nikkei 225 futures for a test of the 41,000 region, provided the Jul 9 tariff deadline does not reignite trade frictions and JGB yields remain contained.
The writer is senior investment analyst at Phillip Nova
