Japanese Stocks Cool After Topix Record Amid Fed, BOJ Policy Divergence

Japan's stock market experienced a slight retreat on Wednesday, December 10, 2025, following an earlier record high for the Topix index. Investor sentiment was characterized by caution as markets awaited crucial interest rate policy announcements from the Federal Reserve (The Fed) and the Bank of Japan (BOJ).

The benchmark Nikkei 225 index concluded trading down 0.3% at 50,481.99. The Topix index, after briefly touching a historic peak of 3,408.99 in early trading, lost momentum to close 0.2% lower. This cautious trading environment stemmed from the divergent monetary policy paths being charted by the world's two largest economies.

The Federal Reserve's highly anticipated decision was expected to deliver a quarter-point reduction in the federal funds rate, setting the range between 3.5% and 3.75%, the lowest level since 2022. This move was anticipated amid signs of a cooling U.S. labor market, even as inflation remained above the Fed's 2% target. Conversely, the Bank of Japan opted to postpone deliberations on raising its policy rate at its December meeting, maintaining its accommodative stance due to inflation prospects deemed not yet fully stable.

This policy divergence, with the Fed leaning dovish and the BOJ signaling a shift toward hawkishness, created widespread market circumspection. However, the contrasting policies yielded a significant side effect: the sustained weakening of the Japanese Yen (JPY) provided a boost to export-oriented sectors. For instance, shares of major automaker Honda Motor climbed 3.3%, benefiting from increased revenue upon conversion of foreign sales back into Yen.

Sector performance reflected this currency dynamic. Mitsui Kinzoku, a key supplier in the artificial intelligence (AI) supply chain which recently changed its name from Mitsui Mining & Smelting in October 2025, saw its stock rise by 4.4%. In contrast, pharmaceutical firm Shionogi experienced a notable decline, closing down 4% despite the company recently announcing a correction to its Second Quarter Fiscal Year 2025 Consolidated Financial Report. This disparity underscores how market participants are differentiating between sectors based on their sensitivity to exchange rates and the BOJ's domestic policy outlook.

Global investors are now focusing on communications from BOJ Governor Kazuo Ueda, who indicated the central bank is approaching its target for sustained 2% inflation. Market speculation has intensified, with approximately 88% probability priced in for a BOJ rate hike at the next meeting scheduled for December 18-19, which could push the benchmark rate to 0.75%, a level not seen since 1995. The tolerance of Prime Minister Sanae Takaichi's administration toward a BOJ tightening is also factored into these expectations, potentially further pressuring the Yen while benefiting exporters like Honda Motor. This uncertainty, driven by the differing policy trajectories, is set to define Japanese equity market volatility as 2025 concludes.