Tokyo – Japanese markets saw a marked decline on Wednesday, ending a two-day winning streak, due to a combination of profit-taking and escalating geopolitical tensions with China. Economic data also indicated a slowdown in private sector growth momentum.

Market Performance and Leading Stocks

The Nikkei 225 index dropped by 0.5%, settling below 52,300 points, while the broader Topix index fell 0.4% to 3,525 points. The decline was driven by heavy profit-taking in major blue-chip stocks.

Defense sector shares suffered notable losses: Mitsubishi Heavy Industries fell 1.5%, Kawasaki Heavy Industries lost 1.1%. Other major companies also saw declines: SoftBank Group (-0.5%), Mitsubishi UFJ (-0.7%), Sony Group (-2.8%), Toyota Motor (-2.9%), and Tokyo Electric Power Company (-4.6%).

Geopolitical Tensions with China

Investor sentiment was weighed down by geopolitical concerns after China imposed restrictions on the export of military-use products to Japan. This move came in response to statements made by Prime Minister Sanai Takaichi regarding Taiwan last year.

The export controls cover a wide range of materials, including electronics, sensors, and technologies used in shipping and aerospace.

Economic Growth Slowdown

On the economic front, revised data showed a slowdown in activity:

Composite PMI

The S&P Global Japan Composite PMI fell to 51.1 in December 2025, down from a preliminary reading of 51.5 and November's 52.0, marking the lowest level since May. Nonetheless, the index indicated expansion for the tenth consecutive month. The momentum slowed mainly due to a notable drop in service sector activity, while industrial output remained largely stable.

New orders rose slightly after two months of contraction, while foreign demand declined at the slowest pace in nine months. Employment grew at its fastest rate in over two and a half years, driven by hiring in services.

Input cost inflation accelerated to a seven-month high, and output prices continued to rise at a strong pace.

Services Sector

The Services PMI dropped to 51.6 in December 2025, below the initial estimate of 52.5 and November's 53.2, the lowest since May, but still indicating growth for the ninth straight month.

New order growth slowed, despite a slight increase in foreign orders - the first such rise since June. Employment momentum remained strong, with job creation at its fastest since May 2023.

Input cost inflation accelerated to its highest since May and remained well above the long-term average, pushing selling prices up at a historically strong pace. Business outlook stayed optimistic, supported by plans for new product launches, store openings, and improved customer demand.

Yen Under Pressure

The Japanese yen weakened past 156.5 per dollar on Wednesday, extending losses for a second consecutive day as geopolitical tensions with China intensified.

Despite these developments, broader geopolitical risks, including recent US intervention in Venezuela, had a limited impact on currency markets.

Domestically, investors continue to bet on further rate hikes by the Bank of Japan this year, after Governor Kazuo Ueda reiterated that policy adjustments would be based on economic and price developments in line with central bank forecasts. He also expressed confidence in the economy maintaining a virtuous cycle of rising wages and prices.