Japanese equities are expected to enter a correction phase due to pressure from rising interest rates and the exhaustion of catalysts following strong earnings. At the same time, listed companies are expected to post record-high profits again, highlighting their underlying strength.
Current market conditions can be interpreted as a supply-and-demand-driven decline in share prices, combining a temporary valuation adjustment caused by inflation and higher interest rates with a short-term exhaustion of catalysts following the strong earnings season, rather than excessive risk aversion. Robust corporate earnings, in contrast to weak domestic demand in GDP, point to the underlying strength of Japanese equities.
Externally, firm crude oil prices and rising long-term interest rates are exerting macroeconomic pressure on share prices. Market supply and demand are in a vacuum of buying catalysts following earnings announcements, making profit-taking after strong results more likely, while liquidity declines during the summer market lull.
Real GDP in Japan for April–June 2026, based on the first preliminary estimate, remains positive, but weakness in private capital investment and personal consumption is becoming evident. Meanwhile, listed companies are expanding nominal profits through their global earnings power and the benefits of a weaker yen, making the divergence between the macroeconomy and individual companies increasingly pronounced.
Corporate earnings expected to reach record highs may provide downside support. Even when share prices decline because catalysts have been exhausted after earnings announcements or because of the external environment, valuations may become more attractive against the backdrop of earnings growth. Shareholder return measures, including share buybacks and dividend increases, may also support share prices.