2025 Japan trade outlook: Yen, equities, and trade-offs

Japan’s markets are sending mixed signals in 2025: equities are near record highs, yet the yen remains weak. Eric Chia discusses how this trade-off affects earnings, investor sentiment, and macro strategy.

As of June 2025, Japan is painting a fascinating, almost paradoxical picture on the global financial canvas—capturing the essence of the Japan yen equities outlook 2025. On one hand, the Nikkei 225 has been flirting with multi-decade highs, arising from the ashes of past economic stagnation. The index, which smashed its 1989 bubble-era peak, has captured global attention, though it has seen some consolidation, closing around 37,965 on 30 May 2025. 

On the other hand, the Japanese Yen has been on a dramatically different journey. Often found hovering in the 140-150+ territory against the US dollar, in early June 2025, the USDJPY has been seen trading in a range.

This divergence presents the core conundrum: Can Japanese equities continue their exhilarating climb if the yen continues its slide, or will it stage a sharp and dramatic reversal? This is the tightrope Japan walks, and the question that keeps markets captivated.

Key takeaways

Below are five key insights shaping the Japan yen equities outlook 2025, highlighting the interplay of markets, policy, and investor sentiment.

1. Japan’s markets are sending mixed signals. Equities have surged to multi-decade highs, while the yen remains historically weak, creating a divergence that reflects deep structural and policy-driven tensions.

2. The economy’s recovery is shaky and trade-sensitive. Japan’s Q1 2025 contraction was driven by a drop in exports and a surge in imports, with US trade policy uncertainty and weaker Chinese demand compounding this pressure.

3. A weaker yen fuels exports—but inflates domestic pain. While multinational manufacturers enjoy a profit boost from currency translation, import-heavy domestic firms face margin compression due to rising input costs.

4. Yen movements are central to equity outlooks. A sharp yen reversal could undermine earnings and dampen sentiment, especially in export-driven sectors, making FX risk a core variable in equity strategy.

5. Traders are turning to macro pair trades. Positioning through trades like long Nikkei/short yen or Japanese exporters vs. US industrials let investors play with currency-equity dislocations and policy divergences.

A recovery's flicker meets gathering storm clouds

The dawn of 2025 brought a sobering reality check, underscoring the delicate nature of Japan's recovery. The nation's economy didn't just stumble; it unexpectedly recoiled, shrinking by 0.2% quarter-on-quarter in the year's opening three months. 

This was more pronounced than the market's anticipated 0.1% dip and marked a disconcerting U-turn from the 0.6% expansion that had warmed the fourth quarter of 2024. This was the first such contraction in a year, a stark reminder of the recovery's fragility. Annually, the economic engine sputtered, with output shrinking by 0.7%, further etching the story of a recovery fighting for every inch.

Peel back the layers of this downturn, and the culprit becomes clear: net trade acted like a lead weight, dragging the GDP down by a hefty 0.8%. This was the bitter fruit of a 0.6% slide in exports, their first stumble since early 2024, colliding head-on with a 2.9% resurgence in imports. The export engine, once a reliable workhorse, faltered under the strain of waning demand from crucial trading partners, most notably China, and the looming shadow of changing US trade policies under President Trump, along with concerns regarding their impact.   

The Cabinet Office's Monthly Economic Report for May 2025 offered a more measured, perhaps even stoic, official narrative. "The Japanese economy is recovering at a moderate pace," it declared, while candidly acknowledging "the uncertainty arising from the US trade policies and so on exists." The report painted a picture of private consumption and business investment, showing "movements of picking up," and exports, too, had been "showing movements of picking up recently." Yet, the cabinet conceded that industrial production was "flat". This official storyline, while not ignoring the storm clouds of external uncertainties, seemed to carry a slightly more optimistic tune than the stark 1Q GDP numbers might suggest. Perhaps it’s a reflection of hope for sunnier data ahead, or the lag in the official assessment?

The yen’s role in the equity rally

The recent surge in Japanese equities hasn’t occurred in a vacuum, and it’s central to the evolving Japan yen equities outlook 2025. A key factor has been the Bank of Japan's (BoJ) monetary policy divergence from other major central banks like the Federal Reserve and the European Central Bank. While others were aggressively tightening to combat inflation, the BoJ maintained its ultra-loose monetary policy for an extended period and has only recently begun a cautious normalization process. This policy gap, particularly the wide interest rate differential with the US, has fueled "carry trades"–borrowing in low-yielding yen to invest in higher-yielding dollar assets, exerting significant downward pressure on the Japanese currency.

So, how does a weaker yen boost exporters’ earnings? When the yen depreciates, the profits of Japanese export giants (think automotive, machinery, and technology sectors) swell when their overseas earnings are repatriated and converted back into more yen. This accounting tailwind can make their balance sheets look particularly rosy, even if underlying sales volumes haven't dramatically changed. 

This currency dynamic also plays into foreign investor appeal. With the yen weaker, Japanese equities can appear relatively "cheap" when valued in US dollar terms, attracting international capital. Unhedged investors benefit directly from both equity appreciation and any further yen weakness (which makes their dollar-based returns look even better). Conversely, those who hedge their currency exposure are positioning themselves more directly on the underlying performance of Japanese companies, insulated from yen fluctuations.

Earnings vs valuation: A currency-driven trade-off

The yen directly impacts which sectors are leading the equity market's charge, making it a key pillar of the Japan yen equities outlook 2025. Unsurprisingly, sectors that benefit most from yen depreciation are those with significant overseas sales, the titans of export like automobiles, machinery, and technology exporters. Their earnings receive a direct boost when converting foreign currency revenues into a weaker yen.   

However, this creates a fascinating earnings tailwind from a weak yen versus the risk of input inflation for domestic-oriented firms. While exporters celebrate, companies that rely heavily on imported raw materials or components face rising costs due to that same weak yen. This can squeeze their margins unless they can pass these higher costs onto domestic consumers. This dynamic contributes to the "two-track" economy often observed, where export-focused manufacturers might thrive while domestic-focused businesses feel the pinch of imported inflation. The Cabinet Office has noted the downside risk of continued price increases on private consumption.   

The critical question then becomes: Could a sudden yen reversal hurt earnings expectations? Absolutely. If the yen were to strengthen significantly and rapidly, the earnings tailwind for exporters would not just disappear; it would become a headwind. Profits booked in foreign currencies would translate into fewer yen, potentially leading to sharp downward revisions in earnings forecasts and a chilling effect on equity sentiment, particularly for those export-heavy sectors. Morgan Stanley, for instance, factored in an expected yen appreciation when suggesting domestic-focused businesses might outperform exporters. 

What could shift the yen?

The yen's future trajectory is not set in stone. However, several powerful forces could dramatically alter the Japan yen equities outlook 2025, from policy shifts to external shocks.

1. BoJ timeline

Realistic or delayed? The Bank of Japan has embarked on a cautious path to policy normalization, having raised its policy rate to 0.50%. However, the central bank has struck an unexpectedly dovish tone at times, citing uncertainties around US trade policies and the impact of food prices on real wages. Governor Ueda has emphasized a data-dependent approach, stating the BoJ wouldn't "forcefully raise interest rates when underlying inflation is stalling". Market expectations for further rate hikes are divergent, with some seeing hikes later in 2025 and others pushing them into 2026, highly contingent on trade developments and sustained wage growth. 

2. US interest rate trajectory

The wide interest rate differential between the US and Japan has been a primary driver of the yen’s weakness. If the Federal Reserve begins to cut rates more aggressively than anticipated, or if US economic data weakens substantially, this differential could narrow, potentially leading to US dollar weakness and, consequently, yen strength. 

3. Potential for intervention by Japan’s Ministry of Finance (MoF) 

While not a daily occurrence, the threat of direct currency intervention by the MoF always looms when yen movements are deemed excessive or too rapid. Such interventions, aimed at stabilizing the currency, can cause sharp, albeit often temporary, reversals in USDJPY. Though no specific intervention is confirmed for June 2025 in the provided information, it remains a tool in the authorities' arsenal.

Stay long in Japan? 

The bullish case for Japanese equities is underpinned by corporate governance reforms and potential earnings growth. However, the currency dynamic is key. If the yen is expected to strengthen, a rotation towards domestically focused companies (construction, retail, services,and banks) might be prudent, as they are less exposed to currency headwinds and could benefit from a resilient domestic economy. 

Given the divergent forecasts and multiple influencing factors, the USDJPY pair is ripe for volatility. Traders might look for opportunities around key data releases or central bank announcements. Trading strategies could involve range trading if consolidation persists, or positioning for breakouts if key support or resistance levels are breached. 

Macro play trades?

With the yen's volatility and equity momentum creating unique dislocations, macro-oriented trades can help investors express directional or relative views. Here are two setups worth watching.

Long Nikkei / Short yen 

This classic trade plays on the historical negative correlation where a weaker yen often boosts the Nikkei (due to exporter earnings). 

Long Japanese exporters / Short US industrials 

This relative value trade could be considered if one anticipates continued yen weakness benefiting Japanese exporters more than their US counterparts, or if specific trade policies are seen to differentially impact these sectors.

Final thoughts: Is Japan still a buy in 2025?

The allure of Japanese markets in 2025 is undeniable, but the Japan yen equities outlook 2025 remains highly sensitive to currency volatility. The answer to the question, “Is Japan still a buy in 2025?” largely depends on whether the yen stabilizes, continues its slide, or stages a significant reversal.

The structural reforms and the push for a "virtuous cycle" of wage growth and inflation are positive long-term narratives. However, the immediate path is clouded by the currency's volatility and its profound impact on corporate earnings and investor sentiment.   

For traders, Japan remains an attractive, dynamic playground. The potential for significant moves in both equities and the currency offers ample opportunity. However, the environment has become more complex. It’s no longer just about picking the right stocks; the trade now requires a deft hand in timing FX movements and carefully observing the earnings cycle. Success in Japan in 2025 will likely belong to those who can master this intricate dance between the rising sun of its equity market and the often-turbulent tides of its currency.