Japanese equities extended their strong upward momentum in May 2026, supported by continued strength in AI and semiconductor-related stocks, solid corporate earnings and sustained foreign inflows, although geopolitical tensions continued to contribute to market volatility. The Nikkei 225 significantly outperformed rising by 11.88%, while the TOPIX rose by 6.17%, highlighting the ongoing divergence between large-cap technology stocks and the broader market. Early-month gains were driven by optimism surrounding AI-related IPOs despite external uncertainties, with momentum interrupted mid-month by rising interest rates and policy concerns, before recovering towards month-end as sentiment improved and oil prices eased. Sector performance remained uneven, with services and technology leading the advance, while mining lagged, and although trading activity and share buybacks stayed elevated, market leadership remained relatively narrow.

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