Nikkei 225 Analysis: AI Rally, Stretched Valuations, and Carry Trade Risk
Written by Fabien Yip, Market Analyst, IG
Publication Date: June 10, 2026
Overview
The Nikkei 225 has experienced a remarkable 30% surge year-to-date, significantly outperforming the broader TOPIX index, which has only gained around 14%. This divergence is attributed to the price-weighted structure of the Nikkei 225, which has amplified the contributions from a select group of high-priced, AI-linked stocks.
Sector Performance
Technology stocks have been the primary drivers of this advance, with materials and financials also performing well. Notably, companies outside the technology sector, such as Resonac and Mitsui Kinzoku, have seen substantial gains due to their involvement in the AI supply chain, reflecting a structural re-rating of firms integral to AI hardware development.
Valuation Concerns
Despite the impressive gains, the Nikkei 225 is now trading at a forward earnings multiple of 22.7x, while the TOPIX stands at 16.7x, both exceeding their historical averages. Although Q1 2026 earnings showed a 14% year-on-year growth, this was below analyst expectations, indicating a narrow margin for error in the current valuations.
Bank of Japan Policy Uncertainty
The macroeconomic landscape is complicated by the Bank of Japan's (BoJ) policy direction. Recent meetings have shown a divided board regarding interest rate hikes, with a potential increase expected in June 2026. The market is concerned about the implications of a hawkish stance from the BoJ, which could lead to a significant unwinding of global carry trades, particularly affecting the yen.
Technical Analysis
After a substantial rise, the Nikkei 225 has undergone a correction, testing support levels around 63,000. This pullback is viewed as a healthy reset, with the potential for further consolidation before a retest of previous highs, provided the index remains above key moving averages.