The Japanese stock market had an extraordinary 2023 by several measures. The 28% gain of the benchmark Nikkei 225 last year was its fastest expansion in a decade, while it ended the year at 33,464.17 – the highest tally since the twilight of the Japanese bubble economy in 1989.
The Tokyo Stock Price Index (TOPIX) rose 24% in 2023 through mid-November in local currency terms, its fourth-best annual performance since 2001.
Japanese equities are likely to continue their strong performance in 2024 thanks to broadly favorable market and regulatory conditions as well as the support of some high-profile investors.
Strong Fundamentals
Key regulatory reforms in Japan’s capital markets augur well for stock performance in 2024. 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 said in November.
Some of the world’s largest institutional investors are bullish about Japan. The biggest of them, BlackRock, said in September that it would raise its allocation to the world’s second largest economy, despite a suboptimal global market environment characterized by high interest rates, sluggish economic activity and persistent inflation. “We turn even more positive on Japanese equities, going overweight due to strong earnings, share buy backs and other shareholder-friendly corporate reforms,” the BlackRock Institute said.
The Buffett Factor
It is impossible to prove that Warren Buffett’s bullishness on Japanese equities boosted the Japanese stock market’s performance last year, but we can say with a large degree of certainty that it has not hurt. Following Buffett’s interview with Nikkei Asia in April – in which he extolled the virtues of investing in Japan – Japan’s stock market saw 10 weeks of consecutive net foreign buying in cash and futures, totaling 7.9 trillion yen ($53 billion).
Meanwhile, Buffett’s preferred Japanese companies, Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., Marubeni Corp. and Itochu Corp. — rose 20% after he said in April that he sought to raise his exposure to them to 7.4%, adding that Berkshire Hathaway would purchase a maximum of up to 9.9% of any of the trading companies and hold the investments for 10-20 years.
“I was confounded by the fact that we could buy into these companies,” Buffett told CNBC in April. They had in effect “an earnings yield maybe 14% or something like that, but dividends would grow.”
Looking ahead, Buffett could target Japanese banks and insurers next. The legendary investor likes businesses that could be described as “boring” yet also with attractive valuations and solid fundamentals. So, tech startups and cryptocurrency, not so much, but Japanese financial firms – quite possibly.
Rational Exuberance
To be sure, there are some caveats for Japanese stocks this year – largely macroeconomic in nature. The yen is expected to appreciate this year as the U.S. Federal Reserve plans to cut the benchmark interest rate while the Bank of Japan is likely to wind down its negative interest rate policy. A stronger yen could weigh on stock prices, especially those of top electronics and auto companies.
That said, we believe that Japanese stocks can ultimately overcome any headwinds from a stronger yen given that corporate earnings are expected to continue improving this year. Nomura Securities estimates that listed companies will post 8% growth in 2024 led by gains in semiconductors and related electronics.
Meanwhile, analysts polled by Reuters forecast that the Nikki will continue to rally into 2024 and reach a 30-yearhigh of 35,000 by the end of June, driven by pent-up demand in both business investment and consumer demand, particularly for services.
For its part, UBS Global Wealth Management expects Japan’s stocks to continue rallying this year amid solid economic growth. So-called “value stocks” – a cohort that looks cheap given fundamentals and which rallied about 30% in 2023 – are especially worth following closely. Value stocks are likely to get a boost in 2024 from a projected 3% to 4% nominal growth in the Japanese economy and efforts by the Tokyo Stock Exchange for better returns on equity.
Finally, another variable that could boost Japan’s stock market this year would be publicly naming the companies that have outlined capital improvement plans – an idea first mooted in October by Tokyo bourse operator Japan Exchange Group Inc and expected to be implemented this year.
While releasing the names of these companies could involve more costs for them, investors would respond positively to the concrete effort to disclose important information.