Japan’s 69% earnings surge in 2Q26: Is the rally built to last?

• Nikkei 225 earnings accelerated sharply: Aggregate earnings growth reached 69% YoY in 2Q2026, up from 45% in the March quarter, providing a strong fundamental underpinning for Japan's equity rally.
  
  
• AI remains the strongest structural earnings driver: Advantest and Tokyo Electron raised their outlooks, signalling that the AI capex cycle is broadening across the supply chain. Materials supporting AI infrastructure and semiconductor production also benefited from the investment cycle.
  
  
• Not all earnings growth is equally durable: Energy's 764% surge and parts of Materials were heavily supported by commodity prices, inventory gains and favourable base effects. Consumer Discretionary companies also benefited from weak-yen tailwinds and cost-cutting, making some of their earnings growth less structurally driven.
  
  
• We favour structural and recurring earnings drivers: We remain constructive on Information Technology and selected Materials, while Financials should benefit from the BOJ's rate-normalisation cycle through improving net interest margins and investment income.
  
  
• Selectivity is increasingly important: Weak-yen benefits and restructuring gains have supported exporters and consumer companies, but persistent input-cost inflation and potential yen appreciation could put pressure on businesses with limited pricing power or weak underlying sales growth.

Nikkei 225 companies delivered an exceptionally strong earnings season in the April–June 2026 quarter, with aggregate earnings rising 69% YoY. Growth was also remarkably broad-based: even excluding the extraordinary surge in the Energy sector, most sectors still delivered double-digit earnings growth.

Figure 1: Earnings growth across sectors

The exceptionally strong earnings have reinforced the fundamental strength behind Japan’s powerful equity rally in 2026. But beneath the headline numbers, the quality of earnings varies. While some sectors are benefiting from structural growth drivers, others are seeing explosive earnings gains driven by cyclical tailwinds or one-off factors. In this article, we unpack the sector-level performance to examine what is driving Japan’s earnings surge and, importantly, assess how sustainable this growth may be.

April-June 2026: Top growth drivers

Energy (+764%): The biggest winner from the Middle East conflict

Energy delivered an extraordinary 764% YoY increase in earnings. The surge was largely driven by the escalation of tensions around the Strait of Hormuz following the US–Israel–Iran conflict, which pushed crude prices significantly higher.

The impact, however, differed significantly across the value chain. Inpex, Japan's largest oil and gas exploration and production company, recorded a 22.8% decline in crude oil sales volumes, partly due to shipping disruptions around the Strait of Hormuz. Nevertheless, higher Brent crude and LNG prices more than offset the volume decline, supporting a 63% YoY increase in EPS. Downstream refiners ENEOS and Idemitsu Kosan experienced an even more dramatic earnings swing. In addition to wider refining margins, both benefited from substantial inventory valuation gains as crude prices rose. Refiners have greater earnings sensitivity to short-term movements in crude prices because of the timing gap between feedstock procurement and product sales. This operating leverage amplified the impact on profits, resulting in quadruple-digit EPS growth for Idemitsu Kosan while ENEOS swung from a loss to profitability.

The key takeaway is that Energy's exceptional quarterly growth is highly cyclical rather than structural. As long as geopolitical tensions remain elevated, earnings could stay strong in the near term, but the current run-rate would be difficult to sustain once crude prices and refining margins normalise.

Table 1: Energy companies’ YoY earnings growth

Company	Sales Growth	EPS Growth
INPEX	-3%	63%
ENEOS Holdings	19%	N.M. (-5.4 -->155)
Idemitsu Kosan	23%	4,097%
Source: Bloomberg. iFAST compilations. Data as of 30 June 2026.

Materials (+138%): Commodity windfall meets structural AI demand

Materials was another standout sector, delivering 137.5% YoY earnings growth. The sector's strength, however, came from several different sources.

Within non-ferrous metals, companies such as Sumitomo Metal Mining, DOWA Holdings and Mitsubishi Materials benefited from higher prices for gold, copper and silver. These businesses are largely price-takers, meaning the sharp rally in underlying commodities flowed relatively directly into their earnings. Copper has an additional structural tailwind. Beyond traditional industrial demand, the rapid expansion of AI data centres is increasing demand for power infrastructure, transmission grids and related electrical equipment, reinforcing the longer-term investment case for copper.

Speciality and electronic materials also benefited from the semiconductor and AI investment cycle, although earnings growth was considerably more moderate at the company level. Shin-Etsu Chemical, one of the world's leading silicon wafer manufacturers, is an important read-through to semiconductor demand. Its earnings increased 5.9% YoY, which appears relatively modest compared with semiconductor equipment makers and may reflect the lag between rising wafer demand, utilisation and eventual pricing. Toray Industries, meanwhile, stood out with 92.4% earnings growth, supported by stronger demand for carbon fibre and advanced materials as well as benefits from its restructuring efforts.

Petrochemicals produced some of the strongest headline numbers within Materials, but we view this as the lowest-quality component of the sector's earnings growth. Much of the improvement reflects extremely depressed year-ago earnings, when companies recognised restructuring and impairment charges. Several businesses, including Sumitomo Chemical's Maruzen/Keiyo joint venture and the Idemitsu/Mitsui Chemicals Chiba joint venture, are also undergoing cracker closures and capacity rationalisation.

Consequently, triple-digit EPS growth in petrochemicals should not be interpreted as evidence of a broad-based structural margin recovery. The favourable comparison base, the non-recurrence of restructuring charges and inventory valuation effects are doing much of the heavy lifting.

Table 2: Materials companies’ YoY earnings growth

Company	Sub-industry	Sales Growth	EPS Growth
Sumitomo Metal Mining	Nonferrous/precious metals	42%	226%
DOWA Holdings	Nonferrous/precious metals	58%	269%
Mitsubishi Materials	Nonferrous/precious metals	38%	N.M. (-31-->392)
Shin-Etsu Chemical	Specialty materials (silicon)	5%	6%
Toray Industries	Specialty materials (fibers)	14%	92%
Sumitomo Chemical	Commodity petrochemicals	10%	N.M. (-2.8 --> 25)
Mitsui Chemicals	Commodity petrochemicals	11%	4,465%
Source: Bloomberg. iFAST compilations. Data as of 30 June 2026.

Information Technology (+88%): The clearest structural growth story

Information Technology remains the most convincing structural earnings growth story, with AI investment continuing to drive demand across semiconductors, memory and semiconductor manufacturing equipment. Kioxia Holdings delivered one of the most dramatic earnings improvements, with quarterly EPS increasing more than 44-fold YoY. AI-driven data-centre demand was a key driver, with data-centre-related products accounting for around 66% of revenue, while SSD and storage-related revenue surged 440% YoY. At the same time, smart-device-related revenue increased 565% YoY, as the severe memory shortage began to spill over into consumer applications.  

However, the magnitude of Kioxia's earnings growth warrants closer scrutiny. The earnings acceleration has been driven predominantly by a sharp increase in NAND selling prices rather than a commensurate increase in shipment volumes. The implication is that Kioxia's earnings have substantial operating leverage to NAND prices in both directions. As long as supply remains constrained, further ASP increases can generate disproportionate earnings growth. However, if NAND price inflation begins to moderate while volume growth remains relatively modest, the earnings trajectory could decelerate sharply. Given the exceptionally high base created by the current price cycle, even a moderation in ASP growth could have an outsized impact on earnings and EPS.

By contrast, semiconductor equipment providers offer a more encouraging signal for the durability of the AI investment cycle. Both Advantest and Tokyo Electron delivered high double-digit YoY earnings growth, supported by sustained demand for equipment used in testing AI inference chips, custom ASICs and HBM memory. More importantly, the underlying demand is increasingly volume- and capacity-expansion driven rather than purely price driven. Semiconductor manufacturers in Korea, Taiwan and the US are continuing to expand advanced-node, HBM, advanced-packaging and AI-related production capacity. Every new fab, production line or capacity expansion requires additional semiconductor manufacturing and testing equipment, creating a more direct link between capital expenditure, equipment orders and revenue growth.

As a result, even if NAND price growth slows, the impact on Advantest and Tokyo Electron should be more limited, provided semiconductor manufacturers continue investing in AI-related capacity. Therefore, within Japan's semiconductor value chain, we would place greater emphasis on companies whose earnings are backed by structural capacity expansion and volume growth, rather than those where earnings are predominantly driven by spot or contract price increases.

Table 3: Information technology companies’ YoY earnings growth

Company	Sales Growth	EPS Growth
Kioxia	416%	4,443%
Advantest Corp	39%	96%
Tokyo Electron	33%	41%
Source: Bloomberg. iFAST compilations. Data as of 30 June 2026.

Consumer Discretionary (87%): Weak-yen tailwinds help, but earnings quality varies

Consumer Discretionary companies generally benefited from the weak yen, with USD/JPY trading in the 155–160 range during much of the quarter. The currency effect supported exporters through both translation benefits and improved competitiveness, particularly across autos, auto parts and electronics.

Autos saw a particularly notable earnings recovery from last year's tariff-related weakness. The reduction in US auto tariffs from 27.5% to 15%, effective from 16 September 2025, together with company-specific cost-cutting programmes, helped lift profitability. Nissan swung back into profitability, supported by its "Re:Nissan" restructuring programme. Toyota Motor reported an 87% increase in earnings, although operating income actually declined 9% YoY. The strong bottom-line growth was therefore partly driven by gains from the partial disposal of Toyota's stake in Toyota Industries and the deconsolidation of Hino Motors, rather than a pure improvement in underlying operating performance. At the other end of the spectrum, Subaru was among the weaker performers, with earnings declining on lower wholesale volumes, higher sales incentives and rising raw-material costs.

Overall, the auto recovery is genuine, but the underlying picture remains mixed. Sales growth remains relatively modest, while profitability is still being supported by cost discipline, currency benefits and favourable comparison base. Rising material costs and lingering disruptions linked to the Middle East remain additional risks.

Electronics generally delivered better-quality growth, although there were notable exceptions. Nikon saw earnings decline 86% YoY, with operating profit in its Imaging business, accounting for around 44% of group revenue, falling 28% as camera and lens volumes weakened amid softer Chinese demand. Higher memory prices also increased component costs.

Retail was considerably more resilient. Ryohin Keikaku, Fast Retailing and Isetan Mitsukoshi all delivered double-digit earnings growth, benefiting from a combination of strong domestic consumption, inbound tourism and the weak yen. Oriental Land, meanwhile, continued to benefit from strong visitor demand at Tokyo Disney Resort, supported by the "Sparkling Jubilee" anniversary events.

The consumer story is therefore increasingly bifurcated: businesses with pricing power, strong brands or structural inbound-tourism exposure are outperforming companies that rely primarily on currency translation or cost cutting.

Table 4: Consumer discretionary companies’ YoY earnings growth

Company	Sub-industry	Sales Growth	EPS Growth
Nissan	Auto	10%	N.M. (-33 à1.1)
Toyota	Auto	10%	87%
Subaru	Auto	3%	-8%
Sony	Electronics	8%	35%
Panasonic	Electronics	6%	89%
Nikon	Electronics	4%	-86%
Ryohin Keikaku (Muji)	Retail	21%	34%
Fast Retailing (Uniqlo)	Retail	22%	39%
Isetan Mitsukoshi	Retail	4%	23%
Source: Bloomberg. iFAST compilations. Data as of 30 June 2026.

Consumer Staples (61%): Pricing power remains the differentiator

Consumer Staples also delivered a broadly positive quarter. Most companies recorded positive sales growth, while earnings growth was generally in the double digits. The stronger performers tend to share one important characteristic: pricing power. Companies capable of passing higher input costs through to consumers are better positioned in an environment of rising wages and persistent inflation.

Meiji Holdings delivered 51% YoY earnings growth, as successful price increases more than offset higher input costs and supported margin expansion. Japan Tobacco similarly demonstrated strong pricing power across its global markets, with pricing execution helping drive a 45% YoY increase in earnings. Conversely, NH Foods and Nisshin Seifun Group were among the few earnings decliners, falling 0.8% YoY and 17% YoY, respectively. Both operate in parts of the food value chain that are more directly exposed to commodity input costs—meat and protein processing for NH Foods and flour milling for Nisshin Seifun—making them more vulnerable to higher feed-grain and wheat costs.

Some of the strongest headline earnings growth, however, should again be treated cautiously. Sapporo Breweries benefited significantly from the disposal of its real-estate business, including the Yebisu Garden Place complex, as well as cost-structure reforms. Similarly, Shiseido saw sales recover in the US and China, but a significant portion of its bottom-line improvement came from aggressive cost-cutting.

The broader lesson is consistent across sectors: pricing power and genuine revenue growth provide a more durable earnings foundation than restructuring gains or non-recurring items.

Table 5: Consumer staples companies’ YoY earnings growth

Company	Sales Growth	EPS Growth
Sapporo Breweries	1%	4,831%
Shiseido	11%	265%
Meiji Holdings	6%	51%
Japan Tobacco	17%	45%
Source: Bloomberg. iFAST compilations. Data as of 30 June 2026.

Be selective: Focus on sustainable earnings growth

The earnings recovery is broad-based, but not all of the 69% YoY growth is equally repeatable. We favour sectors where earnings are supported by structural demand, recurring catalysts and sustainable revenue growth, rather than temporary benefits from commodity prices, FX movements or one-off gains.

Most constructive: AI, Materials and Financials

Information Technology remains our preferred structural growth area. The AI capex supercycle shows little sign of losing momentum, with the latest quarterly results providing further evidence that the investment cycle is broadening beyond traditional AI accelerators into inference chips, custom ASICs, HBM and the wider semiconductor supply chain. As inference and custom-ASIC adoption continue to scale, semiconductor equipment and testing companies should remain key beneficiaries.

We also remain constructive on Materials, but with a preference for companies exposed to non-ferrous metals and speciality materials rather than commodity petrochemicals. The former offers a combination of favourable commodity prices and longer-term structural demand from electrification and AI infrastructure, while speciality materials provide more direct exposure to the semiconductor supply chain.

Financials remain another key beneficiary of Japan's domestic rate-normalisation cycle. Banks and financial institutions have a fundamental and recurring earnings driver: higher net interest margins and improving investment income. As the Bank of Japan continues to normalise monetary policy, this earnings tailwind should become increasingly visible.

Most cautious: Energy, Real Estate, and consumer-facing exporters

Energy earnings are unlikely to be sustainable at the current run-rate. The sector's 764% earnings growth is heavily influenced by inventory valuation gains, elevated refining margins and the geopolitical premium embedded in crude prices. If tensions around the Strait of Hormuz remain unresolved, Energy could continue to report strong year-on-year growth in the September and December quarters. However, this creates asymmetric downside risk: any de-escalation could quickly unwind the geopolitical premium and inventory gains, putting pressure on refiners' earnings.

Real Estate remains an area of caution despite strong underlying property fundamentals. Tokyo office leasing conditions remain exceptionally tight, with Mitsubishi Estate's Marunouchi portfolio recording a vacancy rate of just 0.49%. However, further BOJ rate hikes would gradually increase financing costs and could place upward pressure on capitalisation rates, particularly for leveraged and asset-heavy companies.

The consumer side also warrants greater selectivity. The weak yen has been an important earnings tailwind for exporters, but this benefit could gradually diminish as the BOJ continues its rate-normalisation cycle and the yen gains support. This is particularly relevant for auto companies where underlying sales growth remains modest and recent earnings improvements rely heavily on FX translation or cost-cutting measures.

For domestic retailers and consumer-facing companies, the key risk is increasingly margin pressure from persistent input-cost inflation. With core inflation around the BOJ's 2% target and producer-price inflation remaining elevated at above 7% in July, companies with limited pricing power could face increasing pressure on margins. We therefore favour consumer companies with strong brands, differentiated products and proven pricing power, while remaining cautious on businesses with weak pricing power and limited underlying sales growth.

Japan remains an attractive buy

Japan's earnings momentum has remained exceptionally strong through the first half of calendar 2026. Aggregate Nikkei 225 earnings growth accelerated from 45% YoY in the March quarter to 69% YoY in the June quarter, providing a fundamental underpinning for the strong rally in Japanese equities this year.

We therefore expect FY2026 earnings to remain robust, although the composition of growth is likely to become increasingly important. As the comparison base normalises, sectors currently benefiting from exceptionally low bases, commodity windfalls and one-off gains may see their growth rates moderate. In contrast, sectors supported by structural AI investment, higher interest rates and sustained infrastructure demand should have greater capacity to maintain earnings momentum.

We expect the Nikkei 225 index to reach JPY77,180 as of FY2028, representing 21.6% upside based on earnings. We recommend investors stay invested in Japan but increasingly differentiate between structural earnings compounders and companies whose recent growth is being driven by cyclical or non-recurring factors.

Table 6: Recommended products

Market segment	Recommended products
Japan	·         Xtrackers Nikkei 225 UCITS ETF 1D (LSE: XDJP) ·         Amova Japan Equity SGD (formerly Nikko AM)
Japan dividend	·         Amova Japan Dividend Equity SGD

Table 7: Projected earnings of the Nikkei 225 Index

	FY2025	FY2026E	FY2027E	FY2028E
PE Ratio (X)	27.3	22.3	19.0	16.5
Earnings Growth	28.7%	22.5%	17.0%	15.7%
Earnings Per Share	2,329	2,852	3,336	3,859
Dividend Yield	1.3%	1.5%	1.7%	1.9%
Target Price (JPY) (Based on fair PE ratio of 20X)				77,180
Upside Potential				21.6%
*Each fiscal year ends 31 March. FY26 refers to the 12-month period ended 31 March 2027. Source: Bloomberg Finance L.P., iFAST Compilations. Data as of 15 Sept 2026.

Declaration:
This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.