Japan's Record Bull Run Under Threat as Middle East Conflict Weighs on Earnings Season

Japan's Earnings Outlook Clouded by Mideast Conflict and Higher Oil Prices

TOKYO - As Japanese companies begin earnings season with rosy reports of results past, investors are watching out for signs of the Middle East conflict upending business forecasts and derailing what has been a world-beating bull run in shares. The benchmark Nikkei share price index breached the psychological mark of 60,000 on Thursday, as soaring sentiment toward artificial intelligence and technology stocks helped prices recover from a deep swoon felt by global shares at the outset of the war.

However, the conflict's lasting impact on inflation and oil supply in resource-poor Japan has clouded the outlook for corporate earnings and the chance for further equity gain. Companies such as housing products maker Lixil and chemicals manufacturer Asahi Kasei have flagged input constraints or hiked prices due to the United States-Israeli war with Iran disrupting supplies.

According to Nomura Securities' Revision Index of earnings estimates in Japan, the gauge has fallen to 13, the lowest since September and down from 27 just before the war began in late February. Despite this, the gauge remains positive, unlike negative readings for Nomura gauges tracking the U.S., Europe, China, and emerging markets.

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Fast Retailing, owner of clothing brand Uniqlo, raised its full-year operating profit forecast to 700 billion yen from 650 billion yen, putting the retailer on track for a fifth consecutive year of record earnings. The Nikkei rose a blistering 27% in 2025, outpacing the gain in most global indexes, on a wave of optimism over AI investment and the fruit of corporate governance reform pushed by the Tokyo Stock Exchange.

Japanese stocks "are likely to remain broadly neutral overall, with the market split between winners and losers," said Kota Suzuki, senior strategist at Nomura Asset Management. However, sectors such as semiconductors are likely to move into the positive camp going forward and help lift the Nikkei average, thanks primarily to robust demand, said Suzuki.

Japan relies on the Middle East for some 95% of its crude oil, much of which is channelled through the Strait of Hormuz, a waterway effectively closed by Iran due to the conflict. Citing the recent surge in oil prices, UBS SuMi Trust Wealth Management lowered its forecast for Japanese corporate earnings growth for the year through March 2027 to 7% from 11%. UBS SuMi Trust Japan equity strategist Chisa Kobayashi said that the initial forecast was predicated on U.S. tariffs falling out of the comparison base, generating an on-year profit boost.

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"A certain degree of earnings growth can still be maintained," said Kobayashi.