How to strategize after the Nikkei 225 breaks the 40,000 level? Recommended Japanese stocks and investment guide [2025 Edition]

2025 has been a remarkable year for the Japanese stock market, experiencing a notable rebound. After a brief correction in April, the market quickly launched a strong rally, with May and June performances standing out. By the end of June, the Nikkei 225 index surged past 40,487 points, hitting a nearly one-year high and firmly standing above the 40,000 level. So, the question is: can this upward trend continue? Which Japanese stocks are worth paying attention to? How should ordinary investors participate?

Why Did the Nikkei 225 Surge? How Long Can the Rebound Logic Hold?

The recent rise in Japan’s stock market fundamentally stems from the market’s reassessment of Japanese corporate fundamentals, combined with the resonance of structural advantages.

In April, global markets fell into panic due to trade policy expectations, causing the Nikkei P/E ratio to dip to 12 times, making it much cheaper than major international stock markets. As pessimistic expectations gradually corrected, investors realized their previous concerns were overdone, and the P/E ratio gradually rebounded to around 13 times. This valuation correction became the core driver of the rebound.

Meanwhile, global capital is undergoing large-scale asset allocation adjustments, reducing holdings of U.S. stocks and seeking new investment targets. Japan’s stock market, with its valuation advantage, naturally became a key focus for international capital. But this is not merely a technical rebound—corporate governance reforms on the Tokyo Stock Exchange are truly changing corporate behavior, with more companies increasing dividends and executing share buyback plans, leading to tangible improvements in fundamentals.

Additionally, the recovery of the global tech supply chain has boosted the performance of Japanese semiconductor and precision equipment stocks, further strengthening market confidence in a bullish trend. However, whether this rally can sustain depends on the direction of the Bank of Japan’s monetary policy and whether international investors’ risk appetite will reverse.

Investment Logic for Recommended Japanese Stocks

The actions of Warren Buffett are worth noting. Since 2019, he has been buying into Japan’s five major trading companies, and in June this year, he increased holdings again (involving Mitsubishi Corporation, Mitsui & Co., Itochu Corporation, Sumitomo Corporation, and Marubeni). Consistent with Buffett’s investment style, these stocks are typically held long-term, with little quick turnover. Notably, he publicly stated at the Berkshire Hathaway annual meeting that he “won’t sell these trading stocks for 50 years.” This statement reflects his strong confidence in the long-term value of Japanese companies.

Based on this approach, here are seven Japanese stocks worth watching:

Keyence (6861.JP): The Hidden Champion in Industrial Automation

Keyence, though not as well-known as Sony or Nintendo, is a true leader in industrial automation. Founded in 1974 by Takeshi Takizaki, the company has maintained a “design-oriented” strategy, focusing on developing high-value-added products such as automation sensors, vision systems, and laser marking equipment. Although it does not engage in manufacturing itself, it sells products worldwide through a direct sales network in 46 countries and regions.

Keyence’s product lines cover three major areas: industrial automation (sensors, barcode readers), precision measurement (digital microscopes, measuring instruments), and process control (laser processing equipment). These solutions are widely used in high-end manufacturing sectors like semiconductors, automotive, and biomedicine, with its blue logo becoming a standard in smart factories.

In fiscal year 2024, Keyence reported revenue of 1.059 trillion yen, operating profit of 549.78 billion yen, pre-tax profit of 561.01 billion yen, and net profit of 398.66 billion yen. Wall Street analysts’ average 12-month target price is 74,282.41 yen, with the highest reaching 80,075 yen, representing a potential upside of about 30% from the current stock price of 56,800 yen.

Tokyo Electron (8035.JP): The Golden Cycle of Semiconductor Equipment

Tokyo Electron is an indispensable supplier in the global semiconductor supply chain, with a market capitalization of 12.6 trillion yen. The company mainly supplies critical process equipment such as wafer cleaning systems and deposition equipment to industry giants like Samsung, TSMC, and Intel.

As the strategic importance of semiconductor materials in electronics and military fields increases, demand for related equipment is rising. In fiscal year 2024, Tokyo Electron achieved impressive results with a consolidated revenue of 2.43 trillion yen, up 32.8% year-over-year. Overseas markets performed particularly strongly, with sales growing 36.2% to 2.24 trillion yen, accounting for 92.2% of total revenue; domestic sales grew modestly by 2.7% to 189.98 billion yen.

Despite a 28.5% increase in cost of sales, Tokyo Electron’s cost control was excellent, with gross profit rising 38.1% to 1.15 trillion yen and gross margin improving by 1.7 percentage points to 47.1%. Selling and administrative expenses decreased by 2.1 percentage points to 18.4%, driving operating profit up 52.8% to 697.32 billion yen, with an operating margin of 28.7%, up 3.8 percentage points.

Net profit after tax grew 49.5% to 544.13 billion yen, with EPS soaring from 783.8 yen to 1,182.4 yen. Jefferies analysts maintain a “Buy” rating with a target price of 32,000 yen, making it worth following its future performance.

Mitsubishi Heavy Industries (7011.JP): A Century-Old Industrial Giant Driven by Defense Demand

Mitsubishi Heavy Industries, a venerable Japanese industrial icon dating back to 1884, has evolved from Mitsubishi Shipbuilding to a comprehensive industrial conglomerate covering aerospace, energy equipment, and industrial machinery.

As one of Japan’s oldest heavy industry companies, Mitsubishi Heavy Industries represents the highest standards of Japanese manufacturing. The latest outlook is optimistic: excluding U.S. tariff impacts, benefiting from sustained strong defense demand, the company projects FY2025-26 operating profit to grow 9.6% to 420 billion yen (about $2.9 billion). This forecast is based on the robust FY2024-25 operating profit of 383.2 billion yen, up 35.6% year-over-year.

Among its business segments, aerospace and defense are expected to see a 40% increase in operating profit, becoming the main growth drivers; energy systems are also projected to grow profits by 17%. The average 12-month target price from Wall Street analysts is 3,743.76 yen, with a high of 4,100 yen, representing a potential upside of 17.54%.

Nintendo (7974.JP): Long-term Investment Value in the Gaming Industry

When mentioning Nintendo, most think of classic games that accompanied childhood. However, FY2024 results were disappointing—revenue plunged 30.3% to 1.16 trillion yen, operating profit fell 46.6% to 282.5 billion yen, and net profit shrank 43.2% to 278.8 billion yen.

The decline mainly stems from two points: first, the Switch console has entered the late stage of its lifecycle, with cautious consumer sentiment; second, the upcoming Nintendo Switch 2 has further suppressed consumer purchasing desire. In terms of market distribution, North America contributed 44.2% of revenue, Europe 24.5%, and Japan 23.6%.

Despite short-term poor performance, industry analysts believe the gaming sector is re-emerging as an investment opportunity. The industry continues to grow faster than global GDP, driven by expanding player bases and diversified monetization models—subscriptions, virtual items, seasonal content updates—allowing companies to earn more per user. The average 12-month target price from 11 Wall Street analysts is 14,035.27 yen, with the highest reaching 20,780 yen.

Sony Group (6758.JP): Effective Content Ecosystem Layout

Sony’s latest quarterly net profit increased 4.6% year-over-year to 197.7 billion yen, but the company forecasts a 13% decline in net profit for the new fiscal year, mainly due to U.S. tariff impacts. The music and film content divisions drove profit growth, benefiting from Sony’s active content ecosystem—acquiring game studio Bungie, anime platform Crunchyroll, and collaborating with Kadokawa Group to develop IP derivatives.

In contrast, hardware faces challenges. PS5 sales estimates were revised downward from 18.5 million units to 15 million, reflecting adjustments in the gaming console market. U.S. tariffs are expected to cut about 100 billion yen from Sony’s operating profit, prompting a reassessment of global supply chain strategies.

Sony’s management has begun taking actions, including diversifying production bases and adjusting pricing strategies to counter tariffs. Notably, Sony demonstrates the “resilient management” characteristic of Japanese companies—maintaining hardware operations while accelerating content services. Whether this “soft-hard” strategy can succeed against geopolitical risks remains a key focus. The average 12-month target price from 9 Wall Street analysts is 4,389.49 yen, with a potential upside of 21.69%.

Mitsubishi Corporation (8058.JP): The Trading House Leader Held by Buffett

Mitsubishi Corporation is one of Japan’s five major trading companies and a favorite of Warren Buffett’s Berkshire Hathaway. In June 2025, Berkshire announced increased holdings in all five trading companies by 1.0% to 1.7%, with ownership now between 8.5% and 9.8%.

Buffett’s preference for these trading companies is clear: high capital efficiency, excellent management teams, and a strong focus on shareholder interests. In his February 2025 letter to shareholders, he disclosed that he had obtained Japanese approval to raise holdings above 9.9%, hinting at further increases. These trading firms hold substantial stakes in global energy, resources, and infrastructure projects, with formidable strength.

Mitsubishi Corporation’s FY2025 (ending March 31) results show total revenue of 18.6 trillion yen, down 4.9% year-over-year, but pre-tax profit grew 2.3% to 1.4 trillion yen. Net profit attributable to shareholders was 950.7 billion yen, down 1.4%. This performance demonstrates the resilience of Japanese general trading companies during economic downturns. However, current stock prices are somewhat high; it is advisable to wait for a correction to a reasonable level before considering entry.

Hitachi (6501.JP): From Hardware Manufacturer to Software Service Provider

Hitachi’s development trajectory exemplifies corporate transformation. This 111-year-old Japanese industrial giant has recently made bold moves, including a $9.6 billion acquisition of U.S. digital services firm GlobalLogic, aiming to shift toward a software services company. CEO Toshiaki Higashihara calls this “a major transformation for the entire company.”

Founded in 1910, Hitachi is known for its aggressive M&A strategy among Japanese conglomerates. It has exited most consumer electronics markets, selling aging businesses like power tools and chemicals. Its strategy is clear: retain heavy machinery manufacturing such as rail transit and automotive parts, while fully pursuing industrial digitalization services to help manufacturing clients undergo digital transformation.

Although Hitachi’s stock price fell sharply in April due to trade policy concerns, it quickly recovered and remains near a 20-year high. UC San Diego professor Ulrike Schaede comments that Hitachi’s asset restructuring creates a “Hitachi shock” for conservative Japanese firms, and its shift from electrical manufacturer to infrastructure data solutions provider is a model of corporate transformation. Hitachi’s strength lies in its clear transformation strategy and strong execution, with recent stock performance confirming market recognition of its efforts.

How Can Investors Participate in Japanese Stocks?

Option 1: Invest in Japanese Stock Indexes

Investing in stock indexes is the most direct and straightforward way to participate. Although the gains may be less aggressive than individual stocks, as long as the Japanese stock market as a whole rises, investors can secure the most certain returns. For investors seeking certainty, index investing is the best choice.

The Nikkei 225 index is the most well-known Japanese stock index, covering 225 top-listed companies in Japan, including almost all major Japanese firms. In the first half of this year, the Nikkei 225 initially fell to 31,136 points amid global tariff fears (a low point in over a year), then rebounded strongly driven by valuation recovery, global capital flows, and fundamental improvements. While it’s uncertain whether this rebound will continue, the Japanese stock market has at least shaken off excessive caution, making it a viable asset allocation option.

Option 2: Participate via U.S. Stock Market

Many well-known Japanese companies have issued American Depositary Receipts (ADRs), such as Toyota (TM.US), SoftBank (SFTBY.US), Sumitomo Mitsui (SMFG.US), Nintendo (NTDOY.US), etc. Investors with U.S. brokerage accounts can trade these easily, and their movements are generally aligned with Japanese domestic stocks.

Option 3: Use Taiwanese Brokers for Cross-Border Trading

Buying individual Japanese stocks directly can be cumbersome, but brokers like Yuanta Securities and Fubon Securities in Taiwan can assist with cross-border trading. However, this method involves more complex procedures, limited purchase quantities, and higher fees. Investors should consult their broker’s customer service for specific operations.

Outlook for the Japanese Stock Market

Short-term perspective: The recent trend in Japan’s stock market mainly depends on trade policy expectations. While tariff reductions could bring rebound opportunities, the global economic slowdown and weak Japanese exports suggest the Nikkei may fluctuate between 37,000 and 38,000 points. Market participants warn that current foreign capital inflows are mainly for valuation arbitrage, and how long this hot money can last remains uncertain.

Medium-term perspective: If we extend the timeline to 2026, the turning point could be the Bank of Japan’s monetary policy shift. If the BOJ resumes interest rate hikes, financial stocks could see valuation recovery, and yen normalization could improve corporate profitability. The key is whether the BOJ’s rate hike pace can align well with the global economic situation.

Long-term potential: For the Nikkei to break through 40,000 points again and advance further, multiple positive factors need to occur simultaneously—such as corporate governance reforms boosting ROE, emerging industry competitiveness, and substantive improvements in Japan-U.S. trade relations. However, these conditions are not yet fully in place.

In summary, the core logic of recommending Japanese stocks is based on valuation advantages, fundamental improvements, and long-term investment value. Investors should choose participation methods according to their risk tolerance and investment horizon.