The Nikkei 225 Index concluded 2025 on a remarkably strong note, solidifying its position as one of the world’s top-performing capital markets with a third consecutive year of gains. Despite a modest 0.37% daily dip in its final session, the index has maintained a support level above the psychological 50,000-point threshold, buoyed by resilient corporate earnings and a global boom in artificial intelligence. However, as markets transition into 2026, the focus is shifting from pure valuation expansion to the sustainability of Japan’s economic recovery under the leadership of Prime Minister Sanae Takaichi.

The Takaichi Effect and Industrial Resilience

Market sentiment throughout the week was largely dictated by the “Takaichi effect,” a term describing the optimistic reaction to the administration’s fiscal dove stance. Investors have responded favorably to plans for selectively supporting high-growth sectors such as defense, semiconductors, and nuclear power, which are expected to drive double-digit earnings growth in 2026. This strategic industrial policy has helped offset volatility in the AI sector, where some analysts have expressed skepticism over whether massive infrastructure investments can continue to justify current market valuations.

Monetary Headwinds and the Yen Factor

A significant point of contention for the week was the Bank of Japan’s (BoJ) increasingly hawkish tone, following its decision to lift the policy rate to a 30-year high of 0.75%. While a weaker yen—breaching the 150 mark against the dollar—has historically supported exporters, it is increasingly becoming a political liability by inflating import costs and squeezing household purchasing power. Market participants are now closely monitoring whether the BoJ will implement further hikes in the second half of 2026 to stabilize the currency, a move that could trigger a bearish bias for Japanese equities if the transition is not managed carefully.

Economic Expansion vs. Consumption Slump

Despite the stock market rally, Japan’s broader macroeconomic data presents a paradox; the economy is testing its longest expansion phase since WWII, yet private consumption remains weak. Inflation, particularly in food and energy, has prevented households from feeling the full benefits of the recovery, leading to a shallow GDP contraction in late 2025. For the Nikkei 225 to maintain its trajectory toward the mid-50,000 range, the government must succeed in integrating price hikes with durable wage increases, ensuring that domestic demand can finally act as a stable pillar for the capital market.

The outlook for the Nikkei 225 in early 2026 remains cautiously positive, with the government upgrading its real GDP growth forecast to 1.3%. Analysts emphasize that earnings momentum and record-high share buybacks are the “winning conditions” that could sustain the rally, even if global AI mania begins to cool. However, the primary risks to watch include a potential yen appreciation in the second half of the year and the impact of higher US tariffs on Japanese exports. As the market reopens on January 5, investors will look for signs that Sanaenomics can deliver the structural productivity gains needed to justify a move toward the 60,000-point horizon.