Why Japan’s Nikkei 225 Hit Record Highs

Japan’s Nikkei 225 touched a record high of 43,714 on August 18, 2025, surging 7.68% in a single month. While the US-Japan trade deal provided the necessary thrust, several other factors fuelled the August rally. Recognising news and events with the potential to fuel such rallies in the stock markets can help traders take advantage of emerging opportunities in index trading.

Factors that Drove the August 2025 Nikkei Rally

As the fog around trade uncertainties lifted, investors grew optimistic on Japanese stocks. But that wasn’t the sole driver of the rally. Here’s a round-up of all the factors that drove the Nikkei 225 to surge in August 2025.

US-Japan Trade Deal

The Nikkei 225 surged 3.5%, right after Tokyo and Washington signed a trade deal on July 22, 2025. Reduction of tariffs on auto exports to the US from 25% to 15% led to investor optimism. Japan’s pledge to invest $550 billion in America’s manufacturing sector further supported the momentum. This rally continued well into the second week of August, when the index breached the 43,000 level for the first time in history. Given all these developments, Nozomi Moriya of UBS Securities Japan emphasised that traders must stay updated on the impact of the trade deal.

Trade deals mean more exports and potential industrial growth, which fuels market enthusiasm.

Difference in Valuation

According to the MSCI index, there’s a valuation gap of about 1.52% between the Nikkei 225 and S&P 500. While the former offers a forward P/E of 17.2x, the latter offers 23.3x. This drew investments of about ¥6.81 trillion in the industrial, banking, and consumer goods sectors in Q2 2025. Investments beyond the technology sector drove broad-based growth in Japanese equities.

A valuation gap is often a sign of unexplored potential, drawing investors to explore the opportunities.

Strong Corporate Performance

Stock prices of index heavyweights skyrocketed due to major deals and positive Q2 earnings reports. SoftBank Group started preparations to list its payments app operator, PayPay, in the US after returning to profitability in Q1 2025. Sony Group’s strong earnings drove investor enthusiasm across the technology and entertainment sectors. Advantest and Lasertec benefited from lowered trade barriers for the semiconductor sector. Japan’s Mitsubishi Heavy Industries signed a $6.5 billion frigate warship deal (winning against its German rival, Thyssenkrupp) with Australia.

Strong corporate performances, especially by leading companies, directly drives investor sentiment and ripples across the sector, supporting the growth of smaller stocks as well.

US Inflation Data 

The annual consumer price inflation (CPI) rate in the US remained flat at 2.7% in July (same as June) 2025, below the analyst expectations of 2.8%. Earlier, the Fed had been cautious about trimming interest rates amid the tariff uncertainties and inflationary fears. However, the July report indicated that the US central bank could consider a rate cut in September/October. Contrary to this, a Reuters survey reveals that economists expect the BoJ to raise interest rates, given the global backdrop of macroeconomic uncertainties.

A reduction in the interest rate differential lowers the premium on owning USD, and drives more traders toward the Japanese yen, as it offers greater stability and growth potential during the US-triggered trade tensions.

Trading the Nikkei 225 Index via CFDs

The August rally slowed down in September. This means traders must stay updated on the latest news and practise diligence while making trading decisions. Despite several factors driving investor sentiment, certain risks remain that may dampen the Nikkei 225 rally.

• The index has reached an overbought state. This means there is potential for a trend reversal as the impact of the upthrust fades away.
• The country faces internal political uncertainties after the ruling coalition lost its majority in the July 2025 upper house elections.
• Japan still has unresolved trade issues with the EU and Brazil, potentially weighing on the country’s export income.
• An overly cautious monetary tightening approach could limit the growth potential for interest-sensitive sectors, weighing on the benchmark index’s growth.

The good news is that derivative instruments, such as contracts for difference (CFDs), allow traders to explore opportunities in rising and falling markets. Index trading the Nikkei 225 via CFDs lets you take positions in your speculated direction and hedge them with positions in the opposite direction to manage risks. 

Technical Analysis to Determine Entry and Exit Points

Traders must employ fundamental and technical analysis to make informed trading decisions.  For instance, following a rally, you may want to gauge the potential for it to sustain or reverse. This involves developing trend trading and reversal trading strategies to take advantage of the opportunities arising due to index movements.

Technical indicators, such as the Ichimoku cloud and Aroon indicator, can help you analyse market momentum and trend strength to make informed decisions. Parabolic Stop and Reverse (PSAR) and Fibonacci Retracements can help discover potential reversals in a trend, while Bollinger Bands and the Schaff Trend Cycle (STC) are useful for identifying potential breakouts, and time your entry right.  

To Sum Up

• The Nikkei 225 surged after the signing of a trade deal between the US and Japan in August 2025.
• Positive earnings reports from various industries supported the August rally.
• Japanese stocks were significantly undervalued compared to the US stocks.
• The Japan-Australia warship trade deal fuelled positive market sentiment.
• The Nikkei 225 rally faces risks due to a political gridlock within the country and slow monetary tightening.
• You can explore index trading opportunities during uptrend and downtrends with CFDs.
• Technical indicators that determine trade volume, momentum and potential reversals can help you time your entries and exits.

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