Japan’s stock market stuns as Nikkei and Topix deliver best new‑year gains in nearly 4 decades

Japan kicked off 2026 with its loudest stock rally in almost forty years, as the Nikkei 225 closed at 52,518.08, up 4.3% across two trading days. The Topix index followed with a 3.8% gain. That’s the strongest start for both indexes since 1990, according to Bloomberg.

What’s behind the blast? Foreign funds came in heavy, and local investors jumped back in too, especially those topping off their NISA accounts now that the tax-free cap reset for the year. Brokers said individual traders were buying early and fast.

Retail investors pour in while earnings bets take over

There’s no mystery here. Stocks in Japan are getting a boost from a bunch of different angles—global hopes of interest rate cuts, more confidence in company earnings, better corporate rules, and support from Prime Minister Sanae Takaichi’s spending plans.

Masayuki Doshida, who tracks the market at Rakuten Securities, said most of these earnings hopes are already in the price. But if actual numbers surprise to the upside, the Nikkei 225 could go to 55,000 or more.

“If earnings turn out to be better than the market expects, the Nikkei 225 could reach 55,000 and potentially go even higher,” Masayuki said Tuesday.

The buying isn’t random. Traders say the rally has legs because it’s not just one group piling in. Retail, foreign institutions, and algorithmic funds all pushed capital into Japanese stocks at the same time. Liquidity was steady, not frenzied.

Yields surge as yen chaos clouds bond auctions

The calm didn’t carry into the bond market. After a quiet 10-year government bond auction, concerns around spending and inflation came rushing back.

Japan’s long-term yields spiked, with the 10-year hitting its highest level since 1999. Bond futures lost earlier gains. The 20-year yield hit levels not seen since 1999. The 30-year yield broke records from its first trading day.

None of this was a surprise. The Bank of Japan raised rates to a 30-year high in December, but Governor Kazuo Ueda didn’t say when the next hike would land. So everyone’s guessing. Most analysts think it’ll come around midyear, but others say it could happen sooner if the yen stays weak. Overnight swaps suggest September.

Tuesday’s auction wasn’t a disaster, but it wasn’t perfect either. The bid-to-cover ratio came in at 3.30, down from 3.59 in the last sale, though still above the 12-month average of 3.24.

Currency traders are losing patience with the wild swings in the yen. Shingo Ueno, CEO of Sumitomo said on Tuesday that “Higher volatility forces companies to delay investment.” He added that a slightly stronger yen would be good for Japan’s economy.

Masayuki Omoto, CEO of Marubeni Corp., backed that up. He said it’s nearly impossible to plan anything when the yen jumps more than 10 points against the dollar in a year. That happened in 2025, when the yen went from 140 in April to 158 by the end of the year.

In December, Finance Minister Satsuki Katayama said the government was ready to “take bold action” if this keeps up. Masayuki said clearer management of the yen would give businesses more breathing room to invest.