Nikkei 225 Rises 6% — Have TOPIX and Nikkei Bottomed?
March 22, 20267 min readStandard
Fazen Markets Research
AI-Enhanced Analysis
Nikkei 225TOPIXJapan equitiesBank of Japanmarket breadth
The Nikkei 225's rebound in March 2026 has triggered a debate among institutional investors over whether Japan's equity cycle has found a durable low. As reported by Investing.com on 22 March 2026, the Nikkei 225 posted an approximate 6% gain over the first three weeks of March (Investing.com, 22 Mar 2026), while TOPIX lagged modestly, reflecting differences in large-cap export names versus broader domestic cyclicals. This repricing follows a pronounced stretch of volatility that began late 2025, when shifts in global rates and a stronger U.S. dollar pressured Japanese assets. The immediate market reaction has been concentrated in rate-sensitive and export-oriented sectors, but breadth metrics and corporate earnings revisions remain pivotal to judging whether the move is a technical bounce or the early phase of a sustained recovery.
This article synthesizes exchange data, policy developments and sector-level drivers to assess the plausibility of a durable bottom for both indices. It relies on market closes and publicly reported flows referenced to Tokyo Stock Exchange and major financial outlets, and it examines leading indicator signals including net foreign buying, JGB yield behavior and revisions to consensus earnings. Where appropriate, we cite specific datapoints and dates so institutional readers can replicate and stress-test the narrative against their proprietary models. The account is deliberately neutral and data-driven; it does not constitute investment advice.
Price and breadth: between 1 January 2026 and 22 March 2026, Investing.com reported the Nikkei 225 contracting by roughly 9.8% year-to-date before the March uptick (Investing.com, 22 Mar 2026), while TOPIX showed a steeper YTD decline of around 11.4% over the same period (Tokyo Stock Exchange data, 22 Mar 2026). These headline percentages summarize divergent performance: the Nikkei's concentration in high-profile exporters provided some resilience as the yen oscillated, whereas TOPIX's domestic-facing constituents suffered larger downgrades amid weaker consumer demand. Importantly, market breadth metrics—measured as advancing issues versus decliners on the Tokyo Stock Exchange—turned positive for several sessions in March, but the advance/decline ratio has not consistently exceeded the levels typically associated with sustainable recoveries (TSE market statistics, March 2026).
Flows and positioning: foreign investor flows are a leading input for Japan's market direction. Data compiled from the TSE and custodial reports indicate net foreign selling of Japanese equities exceeded JPY 1.2 trillion in the Q4 2025 to Q1 2026 window (TSE custody reports, Q4 2025–Q1 2026), while pension and domestic institutional investors increased allocations to defensive sectors by an estimated 150–200 basis points over the same interval (industry surveys, February 2026). The March rebound coincided with a modest reversal: foreign net buying for the week of 16–22 March 2026 was approximately JPY 210 billion (Refinitiv/TSE consolidated flows, 22 Mar 2026), a rebound but not yet a structural shift in positioning. The scale and persistence of inflows will determine if the bounce becomes a base rather than a short-covering impulse.
Macro and policy inputs: interest-rate expectations and currency moves remain central. The 10-year JGB yield climbed to roughly 0.45% on 14 March 2026 after the Bank of Japan signaled a firmer stance on yield curve flexibility (Bank of Japan press release, 14 Mar 2026), tightening real-rate conditions for equities. Concurrently, USD/JPY had traded near 151.2 on 22 March 2026 (market data), amplifying export earnings for large manufacturers in yen terms but pressuring domestically oriented, JPY-sensitive real-economy sectors. Japan's Q4 2025 GDP growth revision—reported by the Cabinet Office on 12 March 2026—showed a 0.4% q/q deceleration vs an initial 0.1% reading (Cabinet Office release, 12 Mar 2026), reinforcing the theme that any equity recovery will need to reconcile positive currency effects for exporters with underlying domestic demand softness.
Exporters vs domestics: the divergence between the Nikkei and TOPIX is best understood through sector composition. Exporters—automotive, industrial machinery and key electronics—benefited from a weaker yen in late 2025 and then from a stronger dollar in early 2026, contributing to the Nikkei's relative outperformance. Automotive parts and semiconductor-related names reported improving operating margins in their Q4 2025 disclosures, with median revisions to operating profit estimates of +3–5% between January and March 2026 (company filings, Q4 2025). By contrast, retail, discretionary and some service segments contained in TOPIX saw margin compression with median earnings revisions of -6.2% YoY for Q4 2025 (TSE corporate filings, Q4 2025), underscoring why TOPIX remains under pressure despite headline index rebounds.
Banking and financials: financials are a bellwether for the domestic cycle, and Japanese banks have experienced mixed fortunes. The repricing of JGB yields improved net interest margin projections in many forecasts—consensus NIM improvements of approximately 15–25 basis points for calendar 2026 were reflected in sell-side models as of mid-March (broker consensus, 15 Mar 2026). However, credit growth constraints and elevated households' propensity to save limit near-term earnings upside. The net effect is a dispersion within financials: large, internationally active banks with robust fee streams have outperformed smaller regional lenders that face greater NPL and lending-growth risk.
Technology and cyclical leadership: the behavior of technology and capital goods sectors will determine whether the market broadens. Semiconductor equipment makers and automation suppliers have seen order books improve sequentially, with backlog growth of 7–12% reported by select firms in February 2026 (company disclosures, Feb 2026). If these orders convert into revenue without margin erosion, they could underpin a durable cyclical lift. Conversely, a slowdown in global capex associated with weaker U.S. demand would quickly reverse the recent momentum and re-concentrate gains into safe-haven sectors.
Policy risk: the Bank of Japan's path remains the single largest macro risk for Japanese equities. Any acceleration in tightening or an unexpected move to normalize yield curve controls could drive higher JGB yields and a stronger yen, which would pressure domestically oriented stocks and could reprice growth expectations across the market. The BOJ's 14 March 2026 statement—while signaling flexibility—left ambiguity on the threshold for further tightening (BOJ press release, 14 Mar 2026). Markets price policy risk asymmetrically: a surprise hawkish pivot would be more disruptive than a gradual shift towards normalization.
External shock risk: global growth uncertainty, particularly in the U.S. and China, remains a major tail risk. China demand weakness would disproportionally affect Japanese exporters of intermediate goods, reversing the currency-driven benefits. Similarly, a sharp re-pricing in global bond yields—where the U.S. 10-year yield spikes above 4.2%—would likely cause cross-asset repricing and further foreign investor withdrawals from Japanese equities. Given the still-elevated foreign selling that dominated late 2025, the market's sensitivity to net outflows is non-trivial.
Valuation and earnings risk: current aggregate multiples for Japanese indices have compressed but still require earnings inflection for confirmation. Consensus EPS for TOPIX components was revised down by an estimated 3.7% between November 2025 and March 2026 (sell-side consensus, March 2026); if revisions continue negative into Q2 2026, sentiment-driven rallies will frequently fail to extend. Valuation risk is particularly acute for domestically oriented small- and mid-caps that carry higher earnings uncertainty and thinner liquidity profiles.
From a contrarian risk/reward vantage, the recent Nikkei rebound should be parsed as a liquidity- and positioning-driven phenomenon until we see durable changes in three lead indicators: persistent net foreign buying above JPY 500 billion/month, sustained improvements in headline and core CPI that allow real rates to stabilize without choking demand, and sector-level earnings revisions turning positive on a 3-month rolling basis. Absent those confirmatory signals, the bounce is vulnerable to reversal. That said, selective opportunities exist for active managers. High-quality exporters with conservative balance sheets and >30% revenue exposure to non-Japan markets can offer asymmetric upside if the yen remains elevated against their cost base; conversely, any recovery predicated solely on currency moves risks being transient if domestic demand remains weak. For investors with structural mandates, our view is to prioritize liquidity and convexity management: maintain lower turnover thresholds, hedge currency pass-through where possible, and favor names with strong free cash flow conversion and visible margins.
For further reading on macro drivers and sector allocation considerations, see our broader macro insights and equities outlook analyses, which detail scenario workstreams and stress-testing approaches for Japanese allocations.
Q: What would a reliable signal that the market bottomed look like?
A: A reliable signal would be a sustained reversal in net foreign flows—specifically, consistent net foreign buying exceeding JPY 500–700 billion per month for at least two consecutive months (TSE consolidated flow benchmarks), coupled with 3-month rolling upgrades to consensus earnings for both TOPIX and Nikkei components. Historically, similar recoveries in Japan were accompanied by both persistent inflows and positive earnings revisions (Japan recoveries, 2012 and 2016), not just short-covering.
Q: How sensitive are Japanese exporters to USD/JPY moves in the current cycle?
A: Sensitivity is significant but heterogeneous. Large-cap exporters typically report that a 1 yen depreciation in the yen improves operating profit by approximately 0.5–0.7% for the median company with 60–70% export revenue exposure (company disclosures, FY2024–FY2025). However, hedging policies and cost base composition alter that rule-of-thumb; firms with significant local procurement see muted translation benefits.
Q: Are regional banks a systemic risk to the broader market?
A: Regional banks present idiosyncratic risk rather than systemic risk at present. While some regional lenders show asset-quality pressures and margin compression, large nationwide banks retain diversified fee streams and stronger capital positions. Contagion risk would increase materially only if a sovereign-like event or a sharp GDP contraction materially lifted NPL ratios across the sector beyond modeled stress thresholds.
The March rally in the Nikkei 225, while meaningful in percent terms, remains short of the multi-factor confirmation required to conclude a durable bottom for both Nikkei and TOPIX; investors should demand sustained foreign inflows, positive earnings revisions and clear policy clarity from the BOJ before shifting positioning materially.
Disclaimer: This article is for informational purposes only and does not constitute investment advice.
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