There is no single factor driving the massive rally in Japanese stocks. Rather, it is a confluence of factors from cheap valuations and corporate reforms to a weak yen and low interest rates.
Warren Buffett’s bullishness on Japan may also have something to do with it. In early May, Buffet said he was more comfortable about deploying capital in Japan than Taiwan, citing geopolitical tensions. Berkshire Hathaway, meanwhile, has increased its stakes in Itochu Corp Marubeni Corp, Mitsubishi Corp, Mitsui & Co. and Sumitomo Corp (8053.T) to 7.4%, and Buffett said his company might buy more.
"We feel that these five companies are a cross section of not only Japan but of the world," Buffett told Nikkei Asia in an interview. "They are really so much similar to Berkshire. They own a lot of different things."
Foreigners purchased a net $15.6 billion worth of Japanese shares in April, the highest monthly level in years, according to data from the Japan Exchange Group. They continued to add to their positions in May, the data showed.
Japanese stocks have arguably been boosted the most by a corporate governance overhaul that has required company executives to improve shareholder returns. In early 2023, the Tokyo Stock Exchange began telling companies to focus more on their stock price and figure out how to boost their price-to-book (PTB) ratios — that is, the firm’s share price relative to its net assets. An estimated 50% of Tokyo Stock Exchange-listed companies at a PTB ratio of less than one, compared with just 3% of firms on the S&P 500.
Share buybacks are likely also buoying Japanese stock prices. According to Societe Generale, Japanese firms bought back a record 9.7 trillion Japanese yen ($7 billion) worth of their own stock in the fiscal year ending March 2022.
This so-called “structural change” in corporate governance has the potential to make the current rally endure for some time.