Japanese stocks face continued risk aversion despite record profits, Nomura says

Japanese stocks may remain exposed to a risk-averse investor mood even as corporate profits hit records, with markets assessing how much of the recent earnings strength is sustainable, Nomura said in a sector outlook published Friday.

In the first quarter of fiscal 2026, Japanese companies posted recurring profit growth of close to 50%, far exceeding the consensus forecast of 25%, while return on equity hit an all-time high of 12.1% and operating margins reached a record 9%, according to Nomura.

Nomura, however, noted that investors remain wary because about half of the first-quarter earnings beat was driven by temporary items such as currency gains, tariff rebates and inventory valuations; the remaining half reflected fundamental support from increased volumes and price hikes.

Caution about chasing Japanese equities

This split helps explain why robust earnings have not always produced correspondingly strong share-price moves. Nomura said investors worry that some of the one-off tailwinds could unwind, and positioning shifts have also pressured equities in the aftermath of earnings announcements.

The divergence shows up in benchmark indices: the TOPIX has kept setting fresh records, while the Nikkei 225 has yet to reclaim its late-June high. Nomura partly traced the gap to investor prudence after the earlier surge in AI and semiconductor-linked stocks.

Valuations add to the caution. Nomura observed that the TOPIX is trading at roughly 16–17 times earnings and the Nikkei 225 at about 22–23 times, both above their historical ranges. Even so, the brokerage argued Japanese shares still have upside potential given supportive earnings revisions.

Nomura projects the TOPIX will climb to 4,400 by end-2026, 4,600 by end-2027 and 4,800 by end-2028. The brokerage sees the Nikkei 225 reaching 70,000, 73,000 and 76,000 over the same three year-end horizons.

Support seen from earnings and buybacks

The constructive outlook depends in part on sustained earnings expansion. Nomura lifted its TOPIX earnings-per-share estimates to 244 in fiscal 2026, 269.1 in fiscal 2027 and 287.2 in fiscal 2028, corresponding to year-over-year growth of 19.2%, 10.3% and 6.7%.

The firm also expects robust shareholder distributions to underpin demand. It projects fiscal 2026 dividends of ¥31.6 trillion and buybacks of ¥24 trillion, bringing total shareholder returns to ¥55.6 trillion—a 23.3% increase from the prior year.

Monetary policy represents another possible source of swings, though Nomura does not currently expect the Bank of Japan to tighten to an extent that would meaningfully hurt earnings or growth. The brokerage assumes a terminal BOJ policy rate of 1.75% and describes Japanese financial conditions as still accommodative.

The greater threat, Nomura said, is a 'bad' increase in interest rates. In the latest data, Japan's nominal GDP growth remained above 10-year government bond yields, maintaining the advantageous spread between growth and long-term rates that underpins equities.

But with that spread comparatively thin, a sudden jump in yields could erode the valuation support currently underpinning the market.