Nikkei 225 Hits New High as AI Momentum Continues to Drive the Japanese Market

Over the past month, the index has gained nearly 10%, while compared with the same period last year, it has risen by approximately 74%. This performance shows that capital flows remain optimistic toward the Japanese market, especially as global risk appetite improves and technology stocks continue to play a leading role.

The main drivers supporting the Nikkei 225 come from expectations surrounding AI, the outlook for corporate earnings, and the weakness of the Japanese yen.

Stocks related to semiconductors, technology, and artificial intelligence continue to attract strong inflows, with notable names such as Tokyo Electron, Advantest, and SoftBank Group. In addition, a weaker yen continues to benefit Japanese exporters, as overseas revenue translates into higher value when converted back into the local currency. This helps improve earnings expectations, particularly for sectors such as automobiles, machinery, electronics, and semiconductors.

However, the strong rally in the Nikkei 225 also comes with several potential risks. First, the market is closely watching the possibility that the Bank of Japan may continue raising interest rates in the period ahead, especially as inflationary pressure has not fully eased. Oil prices remaining at elevated levels due to geopolitical risks in the Middle East could increase Japan’s energy import costs, adding further pressure to inflation and giving the BoJ more reason to maintain a cautious policy stance. In addition, the rise in Japan’s 10-year government bond yield could also put pressure on equity valuations, particularly for high-growth stocks.

Another risk to watch is the movement of the USDJPY exchange rate. A weaker yen supports exporters, but if USDJPY continues to approach or break above the psychological 160 level, the risk of currency intervention by Japanese authorities may increase. If the yen rebounds sharply after intervention or following hawkish signals from the BoJ, export-related stocks could face correction pressure, directly affecting the Nikkei 225.

From a short-term outlook perspective, the Nikkei 225 is still maintaining a positive structure as capital flows continue to focus on AI-related stocks, semiconductors, and export-oriented companies benefiting from the weaker yen. If these supportive factors remain in place, the index could still extend its gains or continue trading near new record-high levels.

However, short-term upside may become more cautious as valuations have already priced in much of the positive expectations, while the risk of profit-taking after the strong rally is increasing. Therefore, the Nikkei 225 may enter a phase of slower gains or a technical correction before confirming its next trend. Key factors to monitor in the coming period include USDJPY around the 160 level, the 10-year JGB yield, policy signals from the BoJ, movements in Japanese semiconductor stocks such as Tokyo Electron and Advantest, and oil price volatility amid ongoing geopolitical risks in the Middle East.