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The increase in the Tokyo core consumer price index, which excludes volatile costs of fresh food, compared with a median market forecast for a 2.5% rise. It slowed from a 2.8% increase in November, due largely to a fall in utility bills.

A separate index for Tokyo that strips away both fresh food and fuel costs - closely watched by the Bank of Japan as a measure of demand-driven prices - rose 2.6% in December from a year earlier after a 2.8% increase in November.

The data will be among the factors the BOJ will scrutinise at its next policy meeting on January 22 and 23, when the board issues fresh quarterly growth and inflation forecasts.

The BOJ raised interest rates last week to a 30-year high of 0.75%, taking another landmark step in ending decades of huge monetary support in a sign of its conviction Japan is progressing toward durably hitting its 2% inflation target.

With core inflation exceeding the BOJ's target for nearly four years, Governor Kazuo Ueda has signalled the BOJ's readiness to keep raising rates if the economy continues to improve, backed by solid wage gains.

Some analysts say the yen's recent declines could add to inflationary pressure through rising import costs, a point a few BOJ board members flagged at last week's policy meeting.

Source: Reuters

The number of small-sized initial public offerings in Japan this year fell to its lowest in more than a decade, as the Tokyo Stock Exchange's reform push prompted private companies to reconsider quick listings.

There were 43 initial share sales in Japan with offering sizes below $50 million, the fewest since 2013, according to Bloomberg-compiled data. In contrast, the size of IPO fundraising hit a seven-year high, highlighting the mega-deal listings such as JX Advanced Metals Corp. and SBI Shinsei Bank Ltd.

Small deals have historically dominated Japan's IPO market. Over the past decade, tiny initial offerings accounted for about 82% of the country's total IPOs, based on the average of Bloomberg-compiled data from 2015 to 2024. By comparison, small deals made up 76% of IPOs in India and 55% in Hong Kong.

"It's important for newly listed firms to continue growing after an initial offering and the market is saying 'no' to those companies that can't achieve sustainable growth," said Hiroaki Tomori, an executive fund manager at Mitsubishi UFJ Asset Management. Small listings are usually underperformers, he added.

Small firms often report volatile earnings and leave money on the table in their initial offerings, according to more than 20 interviews with bankers, accountants, investors and corporate executives involved in small IPOs. Institutional investors also tend to shun such illiquid share sales.

The exchange has responded to such concerns, announcing a higher bar for companies to remain listed on its startup market. Firms will be required to maintain a market capitalization of at least ¥10 billion ($64.2 million) after five years, up from the current requirement of ¥4 billion after 10 years.

Chief Executive Officer Hiromi Yamaji of Japan Exchange Group Inc., which operates the TSE, said the goal of the market reforms is not to eliminate smaller IPOs, but to encourage growth-confident firms to come to market.

With larger IPOs, "appropriate pricing is becoming easier to achieve, especially from the perspective of increased trading after listing," said Hiroyuki Tada, executive director at IPO department of Nomura Securities Inc. "The trend that companies aim for an IPO after getting larger is likely to continue."

The environment may make it harder for little-known companies with limited growth potential to list and get the funding that they need, said Takashi Kaneko, professor emeritus at Keio University.

The decline in smaller listings reduces "distortions in the capital market," said Kaneko, who has collaborated with Jay Ritter, a professor at the Warrington College of Business at the University of Florida, on IPO research. Japan is facing "a major turning point in becoming an advanced IPO country," he added.

Source: Bloomberg

Japan's stocks are expected to extend gains in 2026, with Prime Minister Sanae Takaichi's aggressive fiscal plans building on the momentum of the past year.

Tokyo's benchmark Topix index has weathered tariff shocks, two Bank of Japan rate hikes and a change of prime minister to gain about 23% this year, putting it on track for its biggest outperformance versus the S&P 500 since 2022. The rally — which led Japan's benchmarks to multiple record highs — has laid the foundations for further gains, strategists say.

Construction, infrastructure and energy shares are set to shine next year as Takaichi's government pledges trillions of yen in domestic funding. Robot makers may win out, too, as tech focus shifts toward physical AI. Banks, among this year's top performers thanks to higher interest rates, are also expected to extend their rally.

Here are themes expected to drive Japanese stocks in 2026:

Japan's first female prime minister unveiled around ¥18 trillion ($115 billion) in extra stimulus funding in November, fueling investor optimism. Her plan focuses on spending to bolster 17 "strategic industries," including quantum computing and nuclear fusion.

The impact from Takaichi's growth strategy "has got to be net positive for the economy, especially for the equity market," said Naoya Oshikubo, chief market economist at Mitsubishi UFJ Trust & Banking Corp. "Semiconductors, infrastructure, construction companies will all see tailwinds."

Takaichi's utility subsidies and cash handouts should also boost retail stocks by giving consumers more disposable income, said Chris Smith, a portfolio manager at Polar Capital LLP.

But Takaichi brings downside risks too, Smith warned. "She needs to be careful, because her aggressive fiscal policy has been a source of pressure on the yen and bond rates," he said. Japan's ongoing diplomatic spat with China, which was triggered by Takaichi's comments on Taiwan, could also weigh on equities if it escalates, Smith added.

Japan's corporate governance code is due for an update in 2026, driving anticipation for juicier shareholder returns. The revisions are likely to target idle cash holdings, an area Takaichi has said she wants to address.

"We think the Financial Services Agency and Tokyo Stock Exchange are going to start putting pressure on companies who have over a certain level of cash on their balance sheet," said Polar Capital's Smith. If cash-rich companies boost shareholder payouts or invest in growth, Japanese stocks will become more attractive, he said.

Some companies may reallocate cash to mergers and acquisitions. That would further fuel Japan's ongoing deals boom, wrote Morgan Stanley MUFG Securities Co. strategists including Sho Nakazawa in a report. "We hope to see not only a review of balance-sheet management but also an acceleration of initiatives to raise profitability," including M&A, R&D and wage increases, they wrote.

M&A activity this year attracted domestic and global activist investors seeking hidden value. Japan saw 171 activist campaigns in 2025, the most ever, according to Bloomberg Intelligence.

Demand for AI and data centers is set to keep growing next year, despite jitters over tech giants' heavy spending. Those concerns dragged some of 2025's biggest AI winners, notably SoftBank Group Corp., which was lower in recent months, though Masayoshi Son's investment powerhouse remains up 90% year-to-date.

"The theme of AI will continue to attract attention, but the main battleground may start to shift," said Rina Oshimo, senior strategist at Okasan Securities Group Inc. Firms that can harness AI in areas like robotics and medical technology will be investor favorites next year, she predicted. Robot maker Fanuc has already gained 20% since announcing an AI tie-up with Nvidia Corp. earlier this month.

But next year's AI rally may be harder to navigate as Japan's benchmarks are now heavily weighted toward the sector, said Chen Hsung Khoo, a portfolio manager at Franklin Templeton Investments.

"We are very careful what we pay for," said Khoo. "AI is so capital-intensive, but the opportunities are so far out — the uncertainty is high." He's betting on firms with diversified AI exposure, like Ebara Corp., which makes equipment for both semiconductors and energy generation.

The yen is ending 2025 far weaker against the dollar than many expected, providing a strong tailwind for exporters such as automakers and trading houses. That trend will likely endure in 2026, said Mitsubishi UFJ Trust's Oshikubo. The yen has risen less than 1% against the dollar year-to-date as of Dec. 25.

"The BOJ's hikes don't really impact the yen, as the market has already priced in two hikes a year," he said. "I expect the yen will still be around the 150-160 level this time next year."

That bodes well for large-cap exporters, which Oshikubo expects to outperform the benchmark in 2026.

However, JPMorgan Chase & Co. strategists including Rie Nishihara warned that "excessive yen depreciation" poses a "major risk" for equities, noting 165 per dollar marks a breakeven for real income growth.

Gradual BOJ rate hikes may not revive the yen, but together with climbing government bond yields, they remain a tailwind for Japan's banking stocks, said Franklin Templeton's Khoo.

"The earnings power of banks continues to be underestimated by the market," Khoo said. "They're undervalued, so remain a compelling case for us."

Source: Bloomberg

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[Today's Focus]

Japan's government revised up its economic forecast for the fiscal year to next March and projected that growth would accelerate in the following year, on the view that its massive stimulus package will boost consumption and capital expenditure.

The projections are the first to be compiled under Prime Minister Sanae Takaichi's administration, which has announced big spending plans aimed at cushioning the blow to households from rising living costs while promoting investment in growth areas.

Under the latest projections approved by the cabinet on Wednesday, the government expects Japan's economy to expand 1.1% in the current fiscal year, up from 0.7% growth estimated in August due to the smaller-than-expected hit from U.S. tariffs.

Growth is expected to accelerate to 1.3% in fiscal 2026 as robust consumption and capital expenditure offset soft overseas demand, according to the projections.

The government said it expects consumption to rise 1.3% next fiscal year, the same pace projected for fiscal 2025, as tax breaks and moderating inflation underpin household spending.

Capital expenditure will likely increase 2.8% in fiscal 2026, faster than an estimated 1.9% rise for the current fiscal year, due in part to the effect of subsidies and tax breaks aimed at promoting investment in crisis management and growth areas.

The government will use the estimates when it drafts the next fiscal year's state budget, which will be finalised on Friday.

The administration compiled a 21.3 trillion yen ($136.7 billion) stimulus package in November that included payouts to families with children, subsidies to cut utility bills, and fiscal spending to promote investment in areas such as infrastructure, artificial intelligence and semiconductor chips.

The next fiscal year's budget is likely to include record total spending in line with the administration's expansionary fiscal approach, which has heightened market concerns over debt over-supply and pushed up government bond yields.

Source: Investing