Nomura Sees Risk Aversion Persisting for Japanese Stocks
Nomura warns that investor caution may continue to pressure Japanese equities despite record corporate profits, as markets question the sustainability of
Japanese stocks could stay under pressure from a risk-averse mood even after companies posted record profits, according to a sector outlook from brokerage Nomura published on Friday. The firm said markets are weighing how much of the recent earnings strength can be sustained.
Japanese firms reported recurring profit growth of approximately 50% in the fiscal 2026 first quarter, far exceeding the consensus expectation of 25% growth. Return on equity hit a record 12.1%, while operating margins rose to an all-time high of 9%.
Investor Caution Amid Strong Earnings
Nomura noted that investor caution persists because roughly half of the first-quarter profit outperformance stemmed from temporary factors. These one-off boosts included foreign-exchange gains, tariff refunds, and inventory valuation effects. The other half was supported by underlying business improvements like higher sales volumes and price increases.
This split helps explain why strong earnings have not consistently led to equally strong share price gains. Investors are wary that some temporary boosts could reverse. Position adjustments following results have also weighed on stocks, Nomura said.
The divergence is visible in Japan's major indexes. The TOPIX has continued to reach new highs, while the Nikkei 225 has struggled to regain its peak from late June. Nomura attributed part of this split to investor caution following a sharp earlier run-up in shares related to artificial intelligence and semiconductors.
Valuation Concerns and Price Targets
Valuations present another reason for caution. Nomura said the TOPIX trades at around 16 to 17 times earnings, while the Nikkei 225 trades at about 22 to 23 times. Both multiples are above their historical ranges.
Despite these concerns, Nomura argues Japanese equities still have room to rise because earnings revisions remain supportive. The brokerage issued specific index targets.
| Index | End-2026 Target | End-2027 Target | End-2028 Target |
|---|---|---|---|
| TOPIX | 4,400 | 4,600 | 4,800 |
| Nikkei 225 | 70,000 | 73,000 | 76,000 |
Support from Earnings and Shareholder Returns
The bullish case rests partly on expectations for continued earnings growth. Nomura raised its earnings-per-share forecasts for the TOPIX.
| Fiscal Year | TOPIX EPS Forecast | Implied Growth |
|---|---|---|
| 2026 | 244 | 19.2% |
| 2027 | 269.1 | 10.3% |
| 2028 | 287.2 | 6.7% |
Strong shareholder returns are also seen supporting demand. Nomura forecasts total dividends of ¥31.6 trillion and share buybacks of ¥24 trillion for fiscal 2026. That would bring total shareholder returns to ¥55.6 trillion, a year-over-year increase of 23.3%.
Monetary Policy and Interest Rate Risks
Monetary policy from the Bank of Japan is another potential source of volatility. However, Nomura does not currently expect the central bank to tighten policy enough to materially damage corporate earnings or the broader economy. The firm assumes a terminal BOJ policy rate of 1.75% and says financial conditions in Japan remain accommodative.
The bigger risk, according to Nomura, is a 'bad' rise in interest rates. Data shows Japan's nominal GDP growth remained above 10-year Japanese government bond yields, preserving a favorable gap that supports equities. Because that gap is relatively narrow, a sharp increase in yields could undermine the market's valuation support.
