"Japanese Stock Market Investment, TOPIX-Centered Approach Remains Valid... Large Financial Stocks, etc."

Japanese stock market investors are advised to focus on the TOPIX index, which has a higher proportion of companies relatively less affected by tariff policies this year and expected to benefit from exchange rate gains.

On the 21st, Bo-won Choi, a researcher at Korea Investment & Securities, stated in the report titled "Japanese Investment That Must Change from 2024" that "Japan's major indices have underperformed due to increased uncertainty in exchange rates and external policies since the beginning of the year, but they have potential for a rebound." The Nikkei 225 and TOPIX indices, which hit record highs last year, have fallen 3.0% and 1.8% respectively from the start of the year, underperforming major indices in the US, Europe, and other countries.

Researcher Choi noted, "Although short-term fluctuations are inevitable, there is room for a rebound," citing better-than-expected macroeconomic indicators and corporate earnings, eased valuation pressures, and policy expectations from the Japanese cabinet in the first half of 2025.

He explained, "Japan's monthly real wages have turned upward, and real spending has returned to growth. Although the trade balance has shifted to a deficit, the inflow of foreign visitors to Japan continues, and both large and small leading economic indicators are improving." He also emphasized, "The 12-month forward price-to-earnings ratios (12MF PER) of the Nikkei and TOPIX indices are 19.4 times and 14.7 times respectively, indicating reduced valuation pressure, while expectations for corporate earnings improvement compared to major advanced country indices remain favorable."

In particular, Researcher Choi recommended that at this point, focusing on the TOPIX index rather than the Nikkei 225 index is more effective. The TOPIX index is a market capitalization-weighted index covering all companies listed on the First Section of the Tokyo Stock Exchange, and is considered to better reflect the overall market trend due to the higher weighting of large-cap companies.

He pointed out, "The Nikkei index is likely to continue fluctuating at least until March or April due to US tariffs, European geopolitical risks, and Bank of Japan (BOJ) policies. In contrast, the TOPIX index is less affected by tariff policies compared to the Nikkei, has lower burden from BOJ policy rate hikes, and has a higher proportion of companies expected to benefit from yen depreciation." He added, "The TOPIX index also has relatively higher short- and long-term earnings expectations for large companies, and its 12MF PER is below 15 times, making its valuation attractive."

Accordingly, he recommended ETFs such as EWJ and 1306, noting that their burden is limited compared to Nikkei 225-tracking ETFs even when the yen depreciates against the dollar. Additionally, by sector and company, he favored large financial stocks expected to benefit from policy rate hikes, telecommunications and consumer goods sectors with limited US tariff burdens and attractive dividends, as well as robotics, artificial intelligence (AI), and fintech companies. Notable companies mentioned include Mitsubishi UFJ Financial Group, KDDI, Japan Tobacco, and Ajinomoto.