Nikkei Hits Four-Month High on Weaker Yen, Defies Geopolitical Tensions

Tokyo’s Benchmark Index Rallies Amid Currency Slide

The Nikkei 225 surged to a four-month high on Tuesday, buoyed by a weakening yen that boosted export-driven stocks, even as persistent geopolitical tensions kept global investors on edge. The benchmark index closed at 39,235.76, climbing 1.5%, its highest since mid-February.

The Topix index also rose by 1.2% to settle at 2,786.44, with gains seen across key sectors including technology, automotives, and manufacturing.

Weak Yen Powers Export Stocks

The yen slipped to ¥158.72 per U.S. dollar, marking one of its weakest levels in decades. The decline, largely driven by widening interest rate differentials between the U.S. Federal Reserve and the Bank of Japan (BoJ), provided a major boost to Japanese exporters who benefit from increased overseas revenue when converted back to yen.

“Exporters like Toyota, Sony, and Panasonic are clearly in a sweet spot with the yen staying soft,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management. “The currency trend is helping mask underlying concerns around global demand and regional instability.”

Toyota Motor Corp rose 2.3%, while Sony Group advanced 2.7%, and Canon Inc. jumped 3.1%.

Investor Sentiment Remains Resilient

Despite the backdrop of Middle East tensions, ongoing Russia-Ukraine conflict, and concerns over China-Taiwan relations, Japanese equities have remained surprisingly resilient.

“Geopolitical risk is ever-present, but the market appears to be pricing in a status quo scenario rather than immediate escalation,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank. “Investors are more focused on macroeconomic indicators and central bank cues for now.”

Adding to the optimism, U.S. markets provided a positive lead overnight with the Nasdaq and S&P 500 hitting fresh record highs, buoyed by AI optimism and falling treasury yields, further lifting sentiment in Asia.

BoJ’s Stance a Key Driver

The Bank of Japan maintained its ultra-loose monetary policy stance in its recent policy meeting, keeping interest rates steady near zero. This divergence from the tightening cycle seen in the U.S. and Europe has weighed on the yen but bolstered Japanese equities.

“The BoJ is in no hurry to raise rates aggressively, especially amid fragile domestic consumption,” said Hiroshi Matsumoto, senior investment strategist at Pictet Asset Management. “While a weak yen has inflationary consequences, it has thus far been a net positive for large-cap exporters and equity performance.”

Foreign Buying Accelerates

Foreign investors have been net buyers of Japanese equities for six consecutive weeks, data from the Japan Exchange Group showed, adding over ¥1.2 trillion ($7.6 billion) to their holdings since May. The inflows are attributed to favorable valuations, currency dynamics, and improving corporate governance practices across Japanese companies.

“Japan is no longer the sleepy market it used to be. The corporate reforms, dividend increases, and buybacks are making it attractive,” said Rajiv Batra, Head of Equities at Nomura Singapore. “A weak yen is just the icing on the cake.”

Sectors Leading the Rally

Top-performing sectors included:

• Technology: Tokyo Electron and Advantest Corp surged 3.8% and 4.2% respectively on strong demand from U.S. chipmakers.

• Automotive: Nissan and Mazda climbed 2.1% and 2.5%, fueled by yen tailwinds and better U.S. sales data.

• Industrial Machinery: Komatsu and Hitachi Construction Machinery gained on export prospects and infrastructure optimism.

Real estate and utilities were among the few laggards, weighed down by concerns about higher import costs due to currency weakness.

Caution Ahead: Inflation and Intervention Risks

While the yen's weakness has boosted equities, it has also raised concerns about imported inflation and the potential for government intervention in forex markets. Japanese officials, including Finance Minister Shunichi Suzuki, reiterated this week that “excessive currency moves are undesirable,” raising the possibility of intervention if the yen crosses 160 per dollar.

“Currency intervention risk is real,” said Takashi Miwa, chief economist at Nomura Research. “If Japan acts unilaterally, it may spook markets and trigger temporary volatility.”

Investor Outlook

Market analysts remain broadly optimistic on Japan’s near-term equity trajectory, but warn of volatility ahead.

“Japan's fundamentals are improving, and the market is benefiting from a sweet spot of supportive policy, strong corporate earnings, and foreign inflows,” said Mariko Watanabe, equity strategist at Goldman Sachs Japan. “However, risks remain around inflation, global recession fears, and any surprise from the BoJ or global central banks.”

In the medium term, investors are advised to stay selective, focusing on exporters, firms with robust balance sheets, and companies actively improving shareholder returns.