Japan’s Stock Market Continues Impressive Performance; Yen Weakens
Pedestrians walking across with crowded traffic at Shibuya crossing square.
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Japan Stock Market Performance
Japan’s stock market has emerged as a standout performer in the Asia Pacific region, registering impressive gains over the past year. Both the Nikkei and the broader Topix indices have demonstrated remarkable performance, surging more than 25% in 2023, marking their best annual gains in over a decade. So far in 2024, their remarkable ascent continues, with returns of over 10%.
The positive performance can be primarily attributed to solid third-quarter corporate earnings reported by key Japanese companies. Encouraged by these earnings, Bank of America equity strategists have upgraded their year-end forecasts for the Nikkei 225 to 41,000, up from the previous 38,500. Similar upward revisions have been made for the Topix, with forecasts now standing at 2,850, up from 2,715. This optimism is further buoyed by the weakening yen, which has dropped about 6% against the dollar this year.
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Nikkei since December 1989
Foreign Investor Enthusiasm
Foreign investors have been flocking to Japanese equities inspired by Warren Buffet’s optimistic outlook on the Japanese market and the government’s implementation of corporate governance reforms aimed at boosting shareholder returns.
Data from the Tokyo Stock Exchange reveals that in January alone, foreigners injected over 2 trillion yen into the exchange’s “prime” offerings, referring to the largest and most liquid stocks available.
Strong Corporate Performance and Profit Forecasts
Japan’s listed companies have reported strong net profits, and the trend is likely to continue, with a potential record-high net profit projected for the third consecutive year.
Important stakeholders, such as Goldman Sachs analysts, have observed a significant rise in quarterly earnings for the October-December period, indicating a 45% increase from the same period in the previous year and surpassing consensus estimates by 14%.
Moreover, well-known Japanese companies like Toyota, the world’s largest car manufacturer, have upgraded their earnings forecasts, forecasting bigger profit margins and stronger revenue.
Weakening Yen and Concern among Government Officials
The decline in the Japanese yen’s value, primarily due to the divergence between rising U.S. interest rates and Japan’s ultra-easy monetary policy, has resulted in gains for Japanese exporters. However, it has diminished the purchasing power of Japanese consumers.
Numerous Japanese government officials, including Finance Minister Shunichi Suzuki, have expressed concern over the yen’s weakening and its impact on the overall economy.
View the Japanese Yen Performance Chart
Japanese yen to U.S. dollar
The Bank of Japan’s Monetary Policy Landscape
Despite “core core inflation” surpassing the 2% target for more than a year, the Bank of Japan has maintained its negative interest rates regime. Market participants anticipate a shift is on the horizon, with the BOJ expected to abandon this monetary policy at its April policy meeting, triggered by meaningful wage increases resulting from the annual spring wage negotiations.
The central bank believes that higher wages would lead to increased consumer spending and a more meaningful economic turn.
However, prolonged periods of high inflation have negatively impacted domestic consumption, leading to a contraction of Japan’s GDP for a second consecutive quarter. Consequently, Japan relinquished its position as the world’s third-largest economy, ceding it to Germany.
