Japanese Stocks Weighed by Investor Caution Despite Record Profits, Nomura Says

Japanese corporations are reporting record-breaking profits, but investors remain cautious about the sustainability of this performance, leading to a risk-averse mood in the market, according to a recent analysis by Nomura. The brokerage noted that while earnings have been exceptionally strong, a significant portion stems from temporary factors.

Record Profits Tempered by Caution

Japanese companies delivered recurring profit growth of around 50% in the first quarter of fiscal 2026, significantly outpacing the consensus forecast of 25%, Nomura's report detailed. The period also saw corporate metrics reach new peaks, with return on equity hitting a record 12.1% and operating margins rising to an all-time high of 9%.

However, investor enthusiasm has been muted because roughly half of this profit outperformance was driven by one-off items. Nomura specified that factors like foreign-exchange gains, tariff refunds, and inventory valuations were major contributors, raising questions about how much of the recent earnings strength can be sustained.

Market Divergence and Valuation Concerns

This underlying skepticism is visible in the divergent performance of Japan's major stock indexes. The broader TOPIX index has continued to reach new highs, while the Nikkei 225 has struggled to reclaim its peak from late June.

Nomura attributes this split to investor caution following a sharp run-up in AI and semiconductor-related shares earlier in the year, as well as elevated valuations. The TOPIX now trades at 16-17 times earnings and the Nikkei 225 at about 22-23 times, both above their historical ranges.

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Nomura's Bullish Outlook and Key Risks

Despite the market's cautious stance, Nomura maintains a bullish outlook, arguing that supportive earnings revisions provide room for further gains. The firm's positive case is also bolstered by strong shareholder returns, with a forecast for total dividends and share buybacks to reach ¥55.6 trillion in fiscal 2026, a 23.3% year-over-year increase.

Nomura's price targets reflect this optimism:

• TOPIX: Forecast to reach 4,400 by the end of 2026 and 4,800 by the end of 2028.
• Nikkei 225: Seen reaching 70,000 by the end of 2026 and 76,000 by the end of 2028.

The primary risk to this outlook, according to the report, is a “bad” rise in interest rates. While Nomura does not expect the Bank of Japan's monetary policy to derail the economy, a sharp increase in government bond yields could undermine equity valuations by narrowing the favorable gap between nominal GDP growth and long-term rates.