The Nikkei 225 concluded a transformative week of trading, navigating a historic monetary policy pivot that has reshaped the Japanese financial landscape. In a week characterized by early-week technology sell-offs and mid-week caution, the index ultimately found its footing as investors digested the Bank of Japan’s decision to raise interest rates to their highest level since 1995. This move signals a fundamental transition toward monetary normalization, forcing global investors to reassess Japan’s role within a diversified capital market strategy.

A Landmark Shift in Monetary Policy

On December 19, 2025, the Bank of Japan unanimously voted to increase its uncollateralized overnight call rate to approximately 0.75%. This 25-basis-point hike was driven by persistent core inflation, which has remained at or above the 2% target for 44 consecutive months, reaching 3.0% in November. Governor Kazuo Ueda’s statement emphasized that while financial conditions remain stimulative, the probability of achieving sustainable inflation has increased, justifying the withdrawal of some accommodation. For the Nikkei 225, this decision removed a layer of policy uncertainty, allowing the index to reclaim lost ground after a four-day losing streak earlier in the week.

Divergent Sector Reactions and the “Yen Paradox”

A significant development this week was the relative resilience of the Nikkei 225 despite the rate hike, which traditionally supports a stronger currency and pressures exporters. Surprisingly, the Japanese Yen weakened following the announcement as traders focused on the negative real interest rates, which remain around -2.15%. This “Yen Paradox” provided a temporary cushion for major exporters, but the underlying trend shows domestic-oriented stocks—such as those in retail and services—outperforming traditional global powerhouses. Investors are clearly betting that rising wages and improved consumer confidence will drive domestic growth, even as the cost of borrowing begins to rise for the first time in decades.

Global Context and Triple Witching Volatility

The Nikkei’s performance did not occur in a vacuum; it was bolstered by softening inflation data from the United States, which fueled hopes for continued Federal Reserve rate cuts. Friday’s session also coincided with “Triple Witching,” the simultaneous expiration of trillions in stock and index derivatives, which contributed to heightened trading volume and price volatility. For Israeli and global investors, the Nikkei 225 now presents a unique investment comparison: it offers exposure to a developed economy finally exiting deflation, providing a counterbalance to the high-valuation technology sectors in the U.S. and the geopolitical sensitivities of other Asian markets.

The outlook for the Nikkei 225 into early 2026 hinges on the Bank of Japan’s ability to manage further rate increases without triggering excessive volatility in the Japanese Government Bond (JGB) market. While the bullish trend remains intact with short-term support at the 49,130 level, investors must closely monitor the yen’s trajectory and potential geopolitical tensions in the region. The primary risk remains a faster-than-expected tightening cycle that could stifle domestic spending, but for now, the re-emergence of inflation is viewed as a positive signal of economic health.