Japan’s Economic Recovery Fuels 2025 Stock Market Optimism

• Tokyo’s stock market is set to test new highs in 2025, fueled by economic recovery and wage growth.
• The yen’s movements and the policies of the U.S. and Japanese central banks will significantly impact the economy.
• Uncertainties loom due to Japan’s political landscape and incoming U.S. President Donald Trump’s policies.
• The global economy will navigate potential disruptions caused by Trump’s aggressive trade tariffs and tax cuts.

As we step into 2025, the Tokyo stock market is set to test new highs, fueled by hopes of an economic recovery and wage growth. However, the political landscape in Japan and the policies of the incoming U.S. President Donald Trump cast a shadow of uncertainty. Experts predict that the benchmark Nikkei Stock Average could advance toward 45,000, surpassing the all-time high of 42,224.02 reached in July. This follows a 19 percent annual gain in 2024, ending the year at 39,894.54.

The strength of the stock market in 2024 was largely attributed to the weakness of the yen, which boosted the overseas earnings of exporters when repatriated. However, analysts predict that the Japanese currency is likely to firm moderately, trading in a range from 140 to 160 against the U.S. dollar. The movements of the yen are expected to reflect the stances of the U.S. and Japanese central banks.

The Federal Reserve is expected to remain cautious about further easing monetary policy, while the Bank of Japan is likely to raise interest rates at a slow pace. The economic recovery at home is expected to make stocks attractive for investors, with Japan finally appearing to be on a path to realizing wage growth that outpaces inflation.

Tokyo Stocks and Wage Growth

Japanese firms offered historic increases at this year’s annual pay talks, helping wages to outpace inflation in June for the first time in over two years. Economists predict that real wages could stabilize in positive territory in 2025 as firms are expected to continue raising pay amid persistent labor shortages.

The Tokyo bourse’s ongoing reforms encouraging listed companies to enhance shareholder value, including by increasing dividends, are also likely to boost stocks. However, the extent to which Tokyo stocks can reach new highs will hinge on the impact of the next U.S. President’s policies, particularly tariffs, on Japanese companies.

The global economy is not in bad shape, according to Evelyn Partners’ head of asset allocation Kate Morrisey. Unemployment in developed economies is close to record lows and output growth is still solid. However, Donald Trump’s agenda of aggressive trade tariffs and tax cuts is set to dominate markets next year.

Impact of U.S. Policies on Global Economy

The returning U.S. president is expected to be an even more disruptive force in his second term, with repercussions for geopolitics in the Middle East and Ukraine. The U.S. Federal Reserve announced an interest rate cut of 25 basis points in December 2024, reducing its target range to 4.25 to 4.5 percent in its third reduction of the year.

Policymakers also signaled that only two rate cuts are expected in 2025 versus the four originally forecast. This cautious stance regarding rate cuts, along with Trump’s proposals on tariffs, tax cuts, and stricter immigration policy, have raised the prospects of higher inflation after he takes office on Jan. 20.

The German government has been thrown into a crisis once again when chancellor Scholz fired his finance minister after continued disagreement over the budget. The vote of confidence in January will likely be followed by new elections in March. The US dollar has appreciated for a sixth consecutive week on rising yields and bets on above growth trend going into 2025. The euro and yuan have underperformed.