The Japanese stock market remains on a hot streak

Written by Kapronasia || November 29 2023

Japan’s stock market rally seems to have staying power: The Nikkei 225 climbed 0.52% to reach its highest level since July 3 on November 24 while the TOPIX advanced 0.54% to end at 2,390.94. Investors appear to have been reacting to inflation data suggesting that the Bank of Japan will exit its ultra-loose monetary policy sooner rather than later. Data compiled by Goldman Sachs show that the TOPIX had risen 24% in 2023 as November 10 in local currency terms, its fourth-best annual performance since 2001. The Japanese benchmark has significantly outperformed the S&P500 Index of U.S. stocks and Hong Kong’s Hang Seng Index.

Japanese stocks this year have benefited from an inflow of foreign investment. Foreign investors have been bullish on Japanese equities given expectations of stock market reforms, while Warren Buffet’s interview with Nikkei Asia in April – in which he extolled the virtues of investing in Japan – has also boosted interest in Japanese stocks. Goldman Sachs notes that from April to June, Japan’s stock market saw 10 weeks of consecutive net foreign buying in cash and futures, totaling 7.9 trillion yen ($53 billion). Though foreign investors have been selling Japanese stocks in recent months (on net), overseas flows remain positive for the year.

Of particular importance is Japan’s decision to incentivize listed companies to boost valuations and earnings, with the possibility of delisting for firms that fail to show efficient capital allocation. A further sign of improved corporate governance is the unwinding of Japanese companies’ cross-shareholdings — shares that firms own in their business partners to maintain those relationships.

“Continued TSE pressure on corporates to respond to its requests will lead to a further acceleration in corporate governance-related activity amongst listed Japanese companies in 2024,” Goldman Sachs Research strategists Bruce Kirk and Kazunori Tatebe write in the investment bank’s report.

Meanwhile, analysts polled by Reuters forecast that the Nikki will continue to rally into 2024 and reach a three-decade high of 35,000 by the end of June, driven by pent-up demand in both business investment and consumer demand, particularly for services. The median forecast for the Nikkei's level in mid-2024 was 35,000, with responses ranging from 31,143 to 39,500, the Reuters poll of 10 stocks strategists taken Nov. 10-20 showed.

For its part, UBS Global Wealth Management expects Japan’s stocks to extend their outperformance into 2024 amid a revival in domestic economic growth and gradual monetary policy tightening. Value stocks will rally as the economy may post 3% to 4% nominal growth next year and the Tokyo Stock Exchange pushes for better returns on equity.