JAPAN FIRST TO MARKET

Research evidence excerpt

JAPAN FIRST TO MARKET

Asia Pacific Equity Research

Japan First to Market 01 July 2026

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Japan Equity Strategy: 2H 2026 Outlook (Rie Nishihara)

Earnings-driven stock rally to continue: Investment strategy with rising interest rates vs AI growth

This report on the outlook for Japanese equities in 2H 2026 is a collaboration between our equity strategy and equity research

teams. We expect the uptrend in Japanese equities to continue in 2H and have raised our year-end targets to 4,400 for TOPIX

and 75,000 for the Nikkei 225. While the pace of share price gains in 1H was rapid, the rally was driven by earnings centered

on AI semiconductor names, and overheating in P/E multiples receded. The government's two growth strategies of growth

investments in strategic sectors and encouraging individuals to shift their assets into equities and government bonds are likely

to accelerate growth in corporate profits, increase personal disposable income, and stabilize the JGB market, helping to

mitigate the risks of rising interest rates and yen depreciation. Since 2025, the Japanese equity market has not experienced

sustained declines even after major shocks, and we believe that ongoing structural changes, such as corporate reforms and

capital flows, continue to provide significant upside potential over the medium term. In 2H, the key investment focus will be how

much of a headwind rising US interest rates pose to the AI supercycle (rising interest rates vs AI growth). The sustainability of

US Big Tech's AI investment will continue to be questioned. Under our base case scenario, we expect greater market volatility

due to rising interest rates, but also see upside risk to earnings growth and believe the Nikkei 225 could exceed 80,000 by the

end of the year.