As global markets drifted into the holiday period, the Tokyo Stock Price Index (TOPIX) demonstrated remarkable stability, hovering near record territory. The index’s performance this week reflects a complex interplay between robust corporate earnings and the definitive end of Japan’s era of ultra-loose monetary policy. For investors in Israel and beyond, the Japanese market has evolved from a defensive play into a primary driver of global portfolio alpha during 2025.

The Ueda Doctrine: Navigating Higher Rates

The defining theme of the week was the continued market digestion of the Bank of Japan’s recent policy shift. In a landmark move, the central bank raised its uncollateralized overnight call rate to approximately 0.75% on December 19. Governor Kazuo Ueda reinforced this hawkish stance on Thursday, stating that the achievement of the 2% price stability target is “steadily approaching”. While rising rates typically pressure equity valuations, the TOPIX remained buoyant as the BoJ characterized current conditions as still “significantly accommodative,” suggesting that real interest rates remain negative enough to support economic activity.

Data-Driven Optimism: Consumption and Inflation

Macroeconomic indicators released during the December 25-26 window provided a positive backdrop for equities. Retail sales for November rose 1.0% year-on-year, beating the 0.9% forecast. This growth was fueled by steady wage gains and a continued recovery in inbound tourism, which bolstered sectors like pharmaceuticals (up 5.6%) and department stores (up 2.0%). Simultaneously, Tokyo’s core inflation—a leading indicator for national trends—slowed to 2.3%. This “Goldilocks” data suggests that while inflation is cooling from its peaks, it remains high enough to encourage the wage-price spiral the BoJ desires, without forcing an emergency acceleration of tightening cycles.

Strategic Implications for Global Portfolios

The TOPIX’s 5-year growth of 92.48% highlights a structural transformation in the Japanese Capital market. Improved corporate governance and the weak yen—which saw the USD/JPY pair test the 158.00 level earlier this month—have made Japanese exporters highly competitive. However, the strengthening yen following the BoJ’s rate hike could pose a risk to these margins in 2026. Global investors are increasingly viewing Japanese equities not just as a currency play, but as a bet on technological leadership in AI and 6G, sectors that saw significant domestic policy support this month.

Looking ahead, the outlook for the TOPIX remains tethered to the BoJ’s next moves. Investors should closely monitor the January 2026 Outlook Report meeting, where the central bank will likely provide clearer guidance on the timing of the next rate hike. While the 52-week range high of 3,436.75 remains the immediate resistance level, any sustained yen appreciation could trigger a sector rotation from exporters to domestic-focused financials and retailers. The key risk to monitor is whether the Takaichi administration’s fiscal spending plans will exacerbate inflation, forcing a more aggressive BoJ response that could stifle the economic recovery.