Tokyo Stock Market Slides on BoJ Rate‑Hike Jitters: What Nikkei’s 950‑Point Drop Means for 2026

Tokyo’s stock market opened December with a jolt. The Nikkei 225 tumbled 950.63 points on Monday, closing at 49,303.28, a drop of 1.89% from Friday and almost erasing last week’s steady gains. The broader TOPIX index fell 1.19% to 3,338.33. ^[1]

The sell‑off came as investors reacted to a hawkish speech from Bank of Japan (BoJ) Governor Kazuo Ueda, rising Japanese government bond yields, and fresh signs that Japan’s manufacturing and capital spending are losing momentum.

Below is a full rundown of what moved the Tokyo stock market on 1 December 2025, and how strategists now see Japanese equities into 2026.

Key takeaways from 1 December 2025

Nikkei 225 fell nearly 2% to 49,303.28; TOPIX lost 1.19%, closing at 3,338.33. ^[2]
Selling was concentrated in paper & pulp, transport and communications, while a handful of industrial and financial names bucked the trend. ^[3]
The 10‑year JGB yield jumped to about 1.875%, the highest since 2008, as markets priced in a possible BoJ rate hike at the 18–19 December meeting. ^[4]
USD/JPY slipped toward ¥155.6, adding to pressure on export‑heavy stocks and signaling that markets are bracing for a policy shift. ^[5]
New data showed capital spending and factory activity weaker than hoped, intensifying concerns that tariffs and global demand are cooling Japan’s recovery. ^[6]
Despite the sell‑off, major banks and asset managers still see positive—if more selective—upside for Japanese equities into 2026, backed by wage growth, corporate reform and still‑reasonable valuations. ^[7]

Market recap: Nikkei and TOPIX snap back from record territory

Indices

After flirting with record highs above 50,000 in November, the Nikkei 225 finally ran into heavier profit‑taking. Monday’s close at 49,303.28 left the index down almost 2% on the day, its worst session in several weeks. ^[8]

The TOPIX—often seen as a purer barometer of Japanese equities—fell 40.11 points to 3,338.33, also a drop of about 1.2%. ^[9]

Regionally, Tokyo underperformed. While Hong Kong and Shanghai eked out gains, Japanese stocks were singled out as the main laggards in Asia as investors focused on BoJ policy risks rather than the global optimism around potential U.S. rate cuts. ^[10]

Sector moves and market breadth

Intraday data showed that:

Paper & pulp, transport and communication services led the declines on the Tokyo Stock Exchange.
Sumitomo Electric Industries, Japan Post Holdings and Taiyo Yuden managed gains of roughly 3% each, standing out as rare bright spots.
On the downside, Tokyo Electric Power, Fujikura and Mitsui Mining & Smelting dropped between roughly 7% and 10%.
Declining stocks outnumbered advancers by about 2.7 to 1, and the Nikkei Volatility Index eased but remained elevated near the high‑20s. ^[11]

The pattern suggests a classic “de‑risking” session: cyclical and rate‑sensitive names bore the brunt, while a few idiosyncratic stories and defensives attracted bargain‑hunters.

Why Tokyo sold off: Ueda turns more hawkish, yields surge

BoJ Governor Ueda’s Nagoya speech

On Monday morning, BoJ Governor Kazuo Ueda delivered a widely anticipated speech titled “Japan’s Economy and Monetary Policy” in Nagoya. He sketched a cautiously optimistic macro picture:

The contraction in GDP in the July–September quarter is seen as temporary, with the economy expected to return to positive—if modest—growth.
Core inflation (CPI excluding fresh food) is running around 3%, and the BoJ expects it to temporarily fall below 2% in the first half of fiscal 2026 before returning to levels consistent with the 2% target later in the projection period. ^[12]

Crucially for markets, Ueda reiterated that if this baseline scenario holds, the central bank will continue raising the policy rate and adjusting the degree of monetary accommodation—framing rate hikes as easing off the accelerator, not slamming the brakes, because real rates are still well below neutral. ^[13]

Shortly after the speech, the 10‑year JGB yield climbed to around 1.875%, the highest level since mid‑2008, while the yen strengthened from roughly ¥156.3 to around ¥155.6 per dollar by the Tokyo close. ^[14]

Foreign‑exchange commentators described Ueda’s remarks as a “hawkish shift”, with traders now seeing a meaningful chance that the BoJ could raise rates at its December 18–19 meeting rather than waiting until early 2026. ^[15]

Data disappointments: Capex and PMI

The macro backdrop did little to cushion risk appetite:

Government data showed capital expenditure in the third quarter grew 2.9% year‑on‑year, well below market expectations of about 5.9%. Some analyses highlighted a 0.3% quarter‑on‑quarter decline in business investment after five straight quarters of gains, underscoring rising tariff and cost headwinds. ^[16]
The S&P Global Japan Manufacturing PMI edged up to 48.7 in November from 48.2 in October—its highest level since August but still in contraction territory (below 50) for a fifth consecutive month, confirming that factory activity remains under pressure. ^[17]

International coverage linked the weak investment and PMI data to higher U.S. tariffs and softer external demand. Together with Ueda’s tone, the figures reinforced the narrative that Japan is trying to normalize monetary policy just as growth indicators turn patchy. ^[18]

From “Sanaenomics” highs to a December shake‑out

2025 has been an extraordinary year for Japanese equities:

Both TOPIX and Nikkei 225 hit record highs earlier this year, with TOPIX pushing above 3,000 and the Nikkei breaking through the 50,000 mark for the first time. ^[19]
In August 2025, TOPIX finally surpassed the peak it set at the end of the 1980s bubble, closing a 35‑plus‑year chapter of underperformance. ^[20]

Much of the rally has been attributed to:

The election of Prime Minister Sanae Takaichi, whose pro‑growth policy agenda—dubbed “Sanaenomics”—combines aggressive fiscal stimulus, support for defense and technology, and pressure on the BoJ to avoid a premature tightening shock. ^[21]
Massive foreign inflows. One analysis by MUFG, drawing on Ministry of Finance data, estimated that foreign investors bought around ¥7.8 trillion of Japanese equities over the seven weeks surrounding Takaichi’s leadership victory—a record for any such period. ^[22]
A surge of U.S. investors into Japanese tech and AI names, with Goldman Sachs reporting that U.S. flows into Japan are growing at the fastest pace since the Abenomics era. ^[23]

Yet the tide has started to look choppier. Weekly MoF flow data show foreign investors turned net sellers of about ¥349 billion in Japanese stocks in the week to 22 November, following a blockbuster week of buying. ^[24]

In this context, Monday’s drop looks less like an out‑of‑the‑blue shock and more like a natural correction after a steep rally, triggered by the combination of softer data and a BoJ that is clearly preparing markets for higher rates.

Structural story still intact: why many strategists remain constructive

While short‑term traders focused on yields and the yen, longer‑term investors continue to emphasize Japan’s structural transformation.

Corporate governance and shareholder returns

Over the past decade—and especially since 2023—the Tokyo Stock Exchange (TSE) and Japan’s Financial Services Agency have pushed through reforms that force companies to focus on return on equity (ROE) and capital efficiency:

TSE initiatives effectively call on listed companies, particularly in the Prime and Standard sections, to aim for price‑to‑book (P/B) ratios above 1 and ROE around 8% or higher. Firms which fail to outline clear improvement plans can now be publicly named and shamed. ^[25]
These reforms have driven a surge in dividends and share buybacks, with research from Charles Schwab noting that the value of announced buybacks more than doubled in 2024 and remained on a strong pace through 2025, surpassing new share issuance. ^[26]
Cross‑shareholdings—long criticized for insulating management—are slowly being unwound, while M&A activity has jumped to multi‑year highs as companies shed non‑core assets and consolidate key industries. ^[27]

An analysis for Kepler Trust Intelligence estimates that foreign investors purchased roughly ¥10.1 trillion of Japanese equities from the second quarter of 2025 onward, with domestic investors also shifting from cash into tax‑advantaged NISA accounts, creating a rare alignment of foreign and local buyers. ^[28]

Institutional Investor likewise highlights that Tokyo’s strategy to become a leading asset‑management hub has encouraged inflows into both stocks and bonds, backed by clearer governance standards and incentives for long‑term capital. ^[29]

Valuations: still reasonable, not dirt‑cheap

Valuation is where opinion starts to diverge:

A special report from Aranca notes that Japanese equities trade at a forward P/E of about 16–17x, versus roughly 24x for the S&P 500, and that Japanese banks still have some of the lowest P/B ratios among major markets. ^[30]
UBS estimates that Japan’s forward P/E is now around 15.7x, close to the top of its 15‑year range—but argues that with global valuations moving higher, Japan remains attractive on a relative basis, especially as ROE improves. ^[31]
Schwab’s work shows that the P/B ratio for Japanese stocks is still less than half that of the rest of the world, suggesting room for further re‑rating if reforms and earnings momentum continue. ^[32]

The conclusion many global houses have reached: Japan is no longer “very cheap,” but still offers better value than many U.S. and European peers, particularly in banks, industrials and select consumer franchises.

What the latest forecasts say about 2026

Domestic houses: bullish but mindful of BoJ risks

A November outlook from Sumitomo Mitsui DS Asset Management (SMDAM) recently lifted its Nikkei 225 target to 50,300 for end‑2025 and 50,400 for March 2026, with a high‑case scenario above 55,000. Their TOPIX target stands at 3,350 for December 2025 and 3,460 by the end of 2026. ^[33]

Even as they describe the overall stance as bullish, SMDAM warns that:

Continued BoJ tightening could compress equity valuations,
But this may be offset by strong nominal GDP growth, mild inflation, and a wave of share buybacks driven by governance reforms. ^[34]

Global asset managers: constructive but more selective

Recent strategy notes paint a similar, nuanced picture:

Invesco’s Japan equity team describes 2025 as a “historic rally” fueled by optimism around PM Takaichi. They expect real wage growth and stronger household consumption to support domestic demand into 2026, while governance reforms deepen and leadership of the market rotates from narrow AI and semiconductor winners into a broader set of fundamentals‑driven companies. ^[35]
J.P. Morgan Private Bank remains tactically neutral on Japanese equities, seeing limited upside beyond its mid‑2026 bull‑case TOPIX range of 3,200–3,300 from current levels, but still recommends moving allocations up to a neutral 5% in diversified global portfolios, favoring industrials, quality consumer names, tech and financials via active stock‑picking. ^[36]
UBS Global Wealth Management keeps an “Attractive” rating on Japan, arguing that pro‑growth policies, higher ROE and ongoing reforms can justify further gains even as the BoJ hikes slowly. They expect rate increases to be gradual, influenced by global growth and tariff dynamics, and see selective opportunities in IT services, real estate, medtech, defense and AI‑related plays. ^[37]
Hennessy Funds, working with sub‑advisor SPARX Asset Management, points to the 2025 “shunto” wage negotiations, where average pay hikes exceeded 5%, as evidence that Japan is entering a virtuous cycle of rising wages, inflation and corporate profits. They see pullbacks as chances to accumulate high‑quality companies, while flagging extreme yen appreciation as a key risk. ^[38]

At the global level, banks like Morgan Stanley and UBS forecast that Japan will likely underperform U.S. equities but still deliver positive returns, with one Morgan Stanley scenario implying around 7% gains for TOPIX over the next 12 months versus about 14% for the S&P 500. ^[39]

Main risks investors are watching

BoJ December decision and 2026 rate path
- Markets are now pricing in a non‑trivial probability of a rate hike this month, especially after Ueda highlighted fading tariff risks, persistent inflation and the potential for wages to keep rising. ^[40]
- Faster‑than‑expected tightening could pressure equity valuations, particularly in duration‑sensitive growth stocks and highly leveraged firms.
Tariffs and global trade uncertainty
- Special reports warn that higher U.S. tariffs could shave roughly 1 percentage point off Japan’s GDP in worst‑case scenarios, primarily via autos and other exports. ^[41]
- Monday’s capex data and still‑weak PMI readings hint that some of these trade headwinds are already weighing on corporate sentiment. ^[42]
Yen volatility and JGB market moves
- The yen’s sharp swings—driven by both Fed expectations and BoJ signals—create uncertainty for exporters and foreign investors alike.
- Rising JGB yields, now back at levels last seen before the global financial crisis, could hurt banks’ bond portfolios even as they support net interest margins. ^[43]
Tech and AI valuation risk
- Across Asia, profit‑taking in AI‑related names has triggered more than $10 billion in cross‑border outflows from regional equities earlier in November, showing how sensitive markets are to any wobble in the AI narrative. ^[44]
- Given the Nikkei’s heavy weighting to chip and automation stocks, a renewed global tech correction would likely hit Tokyo hard.
Japan’s fiscal path
- With public debt still well above 200% of GDP, strategists worry that larger stimulus packages under Takaichi could eventually push long‑term yields even higher, raising questions about debt sustainability and banks’ exposure to JGBs. ^[45]

What Monday’s move means for investors

For global investors watching the Tokyo stock market via Google News or Discover, Monday’s sell‑off looks like an important inflection point, not just another bad day at the office.

In the near term, volatility is likely to remain elevated as the market digests incoming data, foreign flow swings and every hint from the BoJ ahead of the December meeting.
Over a 12–24 month horizon, the consensus among major asset managers still leans positive:
- Wage growth is firming,
- Inflation is closer to target than it has been in decades,
- Corporate Japan is being pushed—by regulators and shareholders—to use its balance sheets more efficiently.

That combination is rare among large developed markets.

For now, the Tokyo story is shifting from an “everything rally” to a more selective phase. Broad index gains may slow, but investors focused on governance‑driven turnarounds, banks with rising ROE, domestic demand beneficiaries, and high‑quality industrial and tech names tied to AI and energy transition themes could still find compelling opportunities—especially on days like 1 December, when short‑term fear sends the headline indices spinning lower.