Japan stock market review – Nikkei 225 reaches record highs, but what’s next?

2024 was an eventful year for global markets, but especially for Japan.

The Japanese stock market finally surpassed its previous high in December 1989. Corporate governance changes accelerated and the Bank of Japan (BoJ) raised interest rates for the first time in 17 years. We also saw inflation rise to 2.9% and wage hikes reach decade highs, and the Japanese yen fell to a 34-year low against the US dollar.

Within politics, the ruling Liberal Democratic Party (LDP) suffered its second-worst defeat in its history.

So, how did the Japanese stock market cope?

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

Japan’s year in review

A key focus for Japan last year was a change of pace in monetary policy.

In March, the BoJ raised interest rates for the first time in 17 years, which also ended an era of negative rates. They were raised again in July to 0.25%.

The pace of bond buying by the BoJ was also reduced, which allowed bond yields to rise and made Japanese government bonds look more attractive to Japanese investors again.

The BoJ has since been slow to raise rates again, waiting for more economic data instead of making a potentially rushed decision.

Economists now expect another rate rise either in January or March 2025. Clearer messaging around the timing of raises could be a positive for markets and support the yen, which remains weak.

There was also uncertainty within politics last year, though this wasn’t specific to Japan.

In September, Shigeru Ishiba was elected to be leader of the ruling LDP and became prime minister. He subsequently announced a snap election in October, which almost went unnoticed by overseas investors, due to the US Election and UK Autumn Budget dominating news headlines.

The election didn’t go to plan as the LDP recorded their second worst result in history. In the end, a minority coalition government was formed.

Political stability has since wavered, something Japan hasn’t seen for some time, and it also led to a weakening yen and market volatility.

The stock market has also since been impacted by Donald Trump’s re-election in the US in November. Japanese exporters and car manufacturers suffered due to the threat of tariffs and protectionist policies under a Trump administration.

The pharmaceutical sector was also hit following the appointment of Robert F. Kennedy Jr as US health secretary. Uncertainty is likely to persist until Trump’s plans are made clear, which could have a far-reaching impact across the globe.

How have Japanese stock markets performed?

Despite some volatility along the way, the Japanese stock market delivered respectable returns in 2024. And the Nikkei 225, one of Japan’s major stock markets, set an all-time high, beating its previous high in 1989.

The MSCI Japan Index, which includes a broad range of Japanese companies, grew 10.62%* for the year to the end of 2024. This is behind the 20.13% return for the broader global stock market, which was boosted by the performance of US and technology companies. But it’s still a respectable investment return for a one-year period and this is a relatively short timeframe.

Remember though, different countries and sectors will come in and out of favour.

The difference in the way ‘growth’ and ‘value’ companies perform continued throughout the year, and, unlike some other major global markets, Japanese value funds performed much better.

Over the year, the broader index of Japanese value companies grew 10.62%, while growth companies returned 6.23%.

A push to improve the corporate governance standards of Japanese companies has also had an impact here. These changes have benefitted companies with low valuations more, as many were seen to have lower corporate governance standards to begin with.

Looking ahead to 2025, there are a few potential drivers of performance for the Japanese stock market. These include a continued improvement in corporate governance, wage rises, an ongoing shift from cash to investments by Japanese households, and the potential for the major public pension funds to increase investments in Japanese shares.

That said, there are also some uncertainties lingering, including potential changes in BoJ and political policies.

How have Wealth Shortlist funds performed?

Japan’s stock market is often style driven. This comes down to lots of Japanese companies showing traits and characteristics that define either growth or value investing.

So, when a rotation in style occurs, it can impact performance.

Over the last year, value companies have outperformed growth.

For more details on each fund and its risks, use the links to their factsheets and key investor information below. Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own and they understand the specific risks of the fund before they invest.