Japanese companies just delivered their biggest earnings surprise in five years, and it wasn't only the chipmakers doing the heavy lifting.
Even with oil prices climbing, the 500 largest companies together earned ¥21 trillion ($132 billion), blowing past the roughly ¥18 trillion record from a year earlier.
The numbers point to a shift. Profit growth is spreading beyond technology and AI as companies successfully raise prices to cover higher costs. That has analysts and investors wondering if Japan's stock rally has more room to run.
The earnings strength shows up across the board, not just in the usual export and semiconductor names. Domestic-demand companies beat expectations too, which strategist Hiroki Takei at Resona Holdings says is catching investors' attention.
"It wasn't just exporters and semiconductor-related companies whose results exceeded expectations," Takei said. "We saw better-than-expected earnings among domestic-demand firms. Investor interest has broadened compared with before, and I expect that situation to continue."
The market is noticing. In the July through mid-August period, 77% of Topix constituents advanced, and the index gained 4.7%. Compare that to the prior earnings season, when only 56% of Topix members rose even though the index jumped 10.5% - more than double the current period's gain.
That shift matters. A rally driven by a handful of AI winners feels fragile. One where most companies are beating expectations feels different.
The key driver is simple: companies are charging more, and customers are paying. Yasuhiko Hirakawa, who oversees equity investing at Rakuten Investment Management, had anticipated that climbing crude prices would compress margins before anything else. Instead, the opposite happened.
"It feels like the effect of price increases is coming through," Hirakawa said. "I had expected companies to lag in passing on higher crude oil costs, causing margins to deteriorate first. Instead, the opposite has occurred."
Chip-related firms like Advantest Corp. and Tokyo Electron Ltd. saw their stocks jump after beating estimates, but so did Nitori Holdings Co., LY Corp., and Otsuka Corp.
Profit declines were mostly limited to airlines and utilities, which have the most exposure to the Middle East conflict. Most other industries posted higher earnings than a year earlier.
Analysts are upgrading their forecasts.
Japan still trails the earnings boom driven by AI in South Korea and Taiwan. But it is outperforming Europe and China by a wide margin. In dollar terms, the Topix has climbed over 67% from its April 2025 low after President Donald Trump's Liberation Day tariffs, roughly matching the MSCI Asia Pacific Index's 69% gain.
The earnings strength came despite an early estimate pointing to an unexpected slowdown in Japan's economy, with weak domestic consumption and capital spending. A softer yen and one-time refunds tied to Trump-era tariffs also helped.
Chisa Kobayashi, Japan equity strategist at UBS SuMi TRUST Wealth Management, says the breadth is what gives her confidence. "We've been able to confirm that companies across a wide variety of sectors are successfully passing higher costs on through prices," Kobayashi said. "In that sense, there is reason to expect the market rally to be sustainable."
Sectors that lagged last quarter - gaming, food, healthcare - are now attracting buyers. That rotation, combined with record margins and broad-based beats, suggests Japan's rally may not need AI alone to keep going.