Japanese stock investment is the right time: Opportunities and risks behind 40,000 points [2025 Japan Stock Picking Guide]

Why Is the Japanese Stock Market Showing a Strong Rebound? How Far Can This Rally Go?

2025 is destined to be an extraordinary year for the Japanese stock market. After a rapid correction in April, the Japanese stocks experienced a robust recovery in May and June. By the end of June, the Nikkei 225 index rose above 40,487 points, reaching a nearly one-year high, just a step away from the 40,000 mark.

The logic behind this rebound is not unfounded. Last April, U.S. tariff policies suddenly intensified, causing global stock markets to panic. The Nikkei P/E ratio was temporarily mispriced down to 12 times, well below the mainstream international market levels. As market sentiment gradually rationalized, investors began to reassess the true value of Japanese companies, and the P/E ratio rebounded to around 13 times. This valuation repair became a key engine of the current rally.

In addition to technical rebound factors, deeper drivers include: first, overseas funds are reallocating assets globally amid the wave of “reducing U.S. stock holdings,” with Japanese stocks becoming a new target due to their relatively attractive valuations; second, the corporate governance reforms promoted by the Tokyo Stock Exchange are showing initial results, with more listed companies emphasizing shareholder returns, increasing dividends, and implementing share buybacks; third, the recovery of the global tech industry chain has boosted the performance of Japanese semiconductor and precision equipment stocks.

But can the rebound continue? The key depends on three major variables: the direction of the Bank of Japan’s monetary policy, changes in global investors’ risk appetite, and the actual progress of Japan-U.S. trade relations.

It is worth noting that Warren Buffett has been investing in Japan’s five major trading companies (Mitsubishi Corporation, Mitsui & Co., Itochu Corporation, Sumitomo Corporation, Marubeni) since 2019, and further increased holdings in June this year. At the Berkshire Hathaway annual meeting, Buffett explicitly stated that he would “not sell these stocks for 50 years,” demonstrating long-term confidence.

List of Recommended Japanese Stocks

Recommendation 1: Keyence — The Hidden Champion in Industrial Automation

Keyence may not be as well-known as Sony or Nintendo, but in the field of industrial automation, it is recognized as a “hidden champion.” Founded in 1974, this Osaka-based company has always adhered to a “design-oriented” philosophy, focusing on R&D of high-value-added automation sensors, vision systems, laser marking equipment, and industrial measurement instruments. Although it does not engage in manufacturing, it sells products worldwide through a direct sales network in 46 countries and regions.

Keyence’s products cover three major areas: industrial automation (sensors, barcode readers), precision measurement (digital microscopes, measuring instruments), and process control (laser processing equipment). They are ubiquitous in high-end manufacturing industries such as semiconductors, automotive manufacturing, and biomedicine. Its blue logo has become a standard feature of smart factories.

Financially, Keyence continues to grow steadily. In FY2024, revenue reached 1.059 trillion yen, operating profit was 549.78 billion yen, and net profit was 398.66 billion yen. Wall Street analysts’ average 12-month target price is 74,282.41 yen, with a high of 80,075.16 yen. Compared to the current stock price of 56,800 yen, the potential upside is as high as 30%.

Recommendation 2: Tokyo Electron — The Hub of the Semiconductor Manufacturing Industry Chain

As a key supplier of semiconductor equipment globally, Tokyo Electron’s market capitalization has surpassed 12.6 trillion yen. This Tokyo-based industry leader supplies critical equipment such as wafer cleaning systems and deposition equipment to giants like Samsung, TSMC, and Intel. With the strategic importance of semiconductor materials in electronics and defense sectors rising, demand for related equipment is also increasing.

In FY2024, performance was impressive: consolidated revenue was 2.43 trillion yen, up 32.8% year-over-year. Overseas sales were particularly strong, growing 36.2% to 2.24 trillion yen, accounting for 92.2% of total revenue. Domestic sales grew more slowly (2.7%) but still contributed 189.98 billion yen.

More notably, cost control was excellent: despite a 28.5% increase in sales costs, gross profit grew 38.1% to 1.15 trillion yen, with gross margin rising 1.7 percentage points to 47.1%. Operating profit surged 52.8% to 697.32 billion yen, with an operating margin of 28.7%. After-tax net profit increased 49.5% to 544.13 billion yen, with EPS jumping from 783.8 yen to 1,182.4 yen.

Analysts like Jefferies maintain a “Buy” rating with a target price of 32,000 yen, reflecting optimism about its future growth.

Recommendation 3: Mitsubishi Heavy Industries — Beneficiary of the Defense Industry

Mitsubishi Heavy Industries is a “Japanese industrial fossil,” with origins dating back to 1884’s Mitsubishi Shipbuilding. Since the Meiji Restoration, this century-old enterprise has participated in Japan’s industrialization and has now developed into a comprehensive giant spanning aerospace, energy equipment, and industrial machinery, representing Japan’s manufacturing excellence.

The sustained demand for defense is the main growth driver. The company expects FY2025-26 operating profit to grow 9.6% to 420 billion yen (~$2.9 billion), based on a solid FY2024-25 actual operating profit of 383.2 billion yen (up 35.6%). Aerospace and defense are projected to see a 40% profit increase, becoming the largest growth engine; energy systems (including turbines and power generation equipment) are also expected to grow profits by 17%.

Eight Wall Street analysts’ average 12-month target price is 3,743.76 yen, with a high of 4,100 yen. Compared to the current stock price of 3,185 yen, upside potential is 17.54%, and the market remains optimistic about this century-old enterprise’s long-term prospects.

Recommendation 4: Nintendo — Cyclical Opportunities in the Gaming Industry

Nintendo is a globally iconic gaming company, but its FY2024 results faced challenges: revenue declined 30.3% to 1.16 trillion yen, operating profit plummeted 46.6% to 282.5 billion yen, and net profit shrank 43.2% to 278.8 billion yen.

The main reasons for the decline are twofold: the current Switch console is in its late lifecycle phase, and consumers are waiting; the announcement of the next-generation Switch 2 further dampened spending willingness. Geographically, the Americas contributed 44.2% of revenue, Europe 24.5%, and Japan 23.6%.

Although short-term performance is weak, the investment logic is based on industry long-term potential. TD Cowen analyst Doug Creutz points out that the growth rate of the electronic gaming industry continues to surpass global GDP, driven by expanding player bases and diversified monetization models—subscriptions, virtual items, seasonal content updates—allowing companies to extract more value per player.

Eleven Wall Street analysts’ average 12-month target price is 14,035.27 yen, with a high of 20,780 yen, indicating market anticipation for the next-generation console cycle.

Recommendation 5: Sony Group — Winner in Content Ecosystem

Sony’s latest quarterly net profit increased 4.6% year-over-year to 197.7 billion yen, but the new fiscal year outlook faces a 13% decline, mainly due to U.S. tariff impacts.

However, the focus is on Sony’s business structure optimization: the music and film content divisions are becoming the main profit drivers. The company’s investments in content ecosystem over recent years—acquiring game studio Bungie, anime platform Crunchyroll, and collaborating with Kadokawa Group on IP development—are gradually paying off.

Hardware sales are adjusting: PS5 sales forecast has been revised downward from 18.5 million units to 15 million units, reflecting a cooling in the gaming console market. Greater challenges come from tariffs, expected to erode 100 billion yen in operating profit, prompting Sony to replan its global supply chain.

Nevertheless, Sony’s management demonstrates the “flexible management” characteristic of Japanese companies—while maintaining hardware, they accelerate transformation into content services. Whether this “soft-hard” strategy can counter geopolitical risks remains a key focus.

Nine Wall Street analysts’ average 12-month target price is 4,389.49 yen, with a high of 4,910 yen. Compared to the current price of 3,607 yen, upside potential is 21.69%.

Recommendation 6: Mitsubishi Corporation — Buffett’s Increased Stake in Japan’s Trading Houses

Mitsubishi Corporation is one of Japan’s five major trading companies and a key investment of Buffett’s Berkshire Hathaway. By June 2025, Berkshire increased its holdings in these trading houses to 8.5%-9.8%. Buffett started investing in these companies as early as July 2019, valuing their capital efficiency, management quality, and shareholder orientation. In his February shareholder letter, Buffett revealed that Japanese authorities have approved increasing his stake to over 9.9%, hinting at continued future investment.

For FY2025 (ending March), Mitsubishi’s revenue is 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 the parent was 950.7 billion yen, only slightly down 1.4%, demonstrating the resilience of Japan’s integrated trading companies.

Current stock prices are somewhat high; it’s advisable to wait for a correction to a reasonable level before entering. But with Buffett’s ongoing support, the investment value remains clear.

Recommendation 7: Hitachi — A Model of Transformation from Manufacturer to Solutions Provider

Hitachi has a history of 111 years. Many older investors remember its TVs, VCRs, and Maxell batteries. Recently, this Japanese industrial giant has been very active, spending $9.6 billion to acquire U.S. digital services company GlobalLogic, aiming to transform into a software service provider. CEO Toshiaki Higashihara calls this a “major transformation” for the company.

Founded in 1910, Hitachi is known for aggressive acquisitions among Japanese conglomerates. It has largely exited the consumer electronics market (retaining some home appliances) and has sold off stagnant businesses like power tools and chemicals. The new strategy is clear: retain heavy machinery manufacturing such as rail transit equipment and automotive parts, and focus on industrial digitalization services to help manufacturing clients undergo digital transformation.

Although it experienced a significant decline in April due to tariff policies, it quickly rebounded and is now near a 20-year high. UC Berkeley professor Ulrike Schaede believes that Hitachi’s frequent asset restructuring has created a “Hitachi shock” for conservative Japanese companies, and its shift from an electrical manufacturer to an infrastructure data solutions provider is a model of corporate transformation.

Hitachi’s advantage lies in its clear transformation strategy and strong execution, as evidenced by its recent stock performance, which shows the market’s recognition of its transformation.

How to Invest in Japanese Stocks?

Once you have identified the stocks you are optimistic about, the next step is to consider how to invest. There are mainly three ways:

Method 1: Investing in the Japan Nikkei 225 Index — The Most Certain Approach

For certainty, investing in the Nikkei 225 index is the most straightforward choice. Although individual stocks may have larger gains, index investing guarantees that as long as the Japanese stock market rises, you can participate in the gains, with relatively balanced risk. The Nikkei 225 covers 225 of the best listed companies in Japan, including most well-known Japanese firms.

In the first half of this year, the index initially fell to 31,136 points amid global tariff fears, then rebounded strongly driven by valuation repair, capital flows, and fundamental improvements. While it’s hard to predict if the rebound will continue, Japanese stocks have at least shaken off excessive caution, making them suitable for asset allocation.

Through CFD trading, you can directly invest in the index price, supporting two-way trading and leverage options from 1-200 times. It’s suitable for small to medium investors. You can start with as little as $50, and new registrations come with additional bonuses.

Method 2: Using U.S. Depositary Receipts (DRs) — High Convenience

Many well-known Japanese companies like Toyota, SoftBank, Sumitomo Mitsui, and Nintendo issue DRs in the U.S. stock market. With a U.S. brokerage account, you can trade these easily, with much higher convenience than directly investing in Japanese stocks. The performance of these U.S. versions generally tracks the Japanese stocks closely.

Method 3: Using Taiwanese Brokers’ Re-entrusted Orders — Traditional but More Limited

Vanguard Securities and Fubon Securities offer re-entrusted services, but operations are more complex, with purchase quantity restrictions and higher fees. It’s advisable to consult customer service for specific procedures.

Outlook for Japanese Stocks

In the short term, the trend of Japanese stocks mainly depends on trade policies. Even if tariffs are reduced, global economic slowdown and weak exports from Japan will likely limit gains, with the Nikkei index oscillating between 37,000 and 38,000 points. Market participants warn that current foreign capital inflows are mainly valuation arbitrage, and how long hot money can sustain is uncertain.

Looking further to 2026, the turning point will be the Bank of Japan’s monetary policy shift. If the BOJ resumes interest rate hikes, financial stocks could see valuation improvements, and yen normalization could enhance corporate profitability. The key is whether the pace of rate hikes can align with the global economic situation.

For the Nikkei to break through 40,000 points again or even higher, multiple positive factors need to align: corporate governance reforms improving ROE, emerging industry competitiveness, and substantial improvement in Japan-U.S. trade relations. These conditions are not yet fully in place, but the long-term opportunities warrant ongoing attention.