Japanese stocks have been riding a rally as investors across the world are eagerly pinning their hopes on the country’s stocks. Having gained over 11% in a month, the Nikkei 225 is now the representative of the rising hope in Japan’s equity market.

 

 

For the unversed, the Nikkei 225 is the most prominent Japanese stock index. It is composed of the Top 225 blue-chip stocks traded on the Tokyo Stock Exchange (TSE). The index has been calculated since September 1950 and is the oldest stock index in Asia. 

The index has been making record highs as it surged to its 33-year high of 32,708.53 on Monday. On Friday, the index closed at 32265.10, translating to a 14.22% growth in a year, higher than the Nifty50’s 12.43% annual growth!!! 

 

But what is driving the rally? Why are investors so optimistic about Japanese stocks??:-

 

  •  Weakening Yen: The Japanese Yen has recently weakened significantly as it hit a 5-month low of 150 Yen per US Dollar! Although the devaluation of a currency is negative for the home country such that it increases the import bill but Japan is different. Japan is an export-based economy.

It is the fifth largest exporter in the world and 37% of its GDP comes from exports. Strengthening against global currencies like the US Dollar and the Chinese Renminbi ends up hurting its exports. However, with a declining value, the exports made by the company become more competitive globally. 

 

  • Improved Economic Outlook: After years of deflation, inflation is returning to the Japanese economy. Although inflation is bad for a country, minimum and controlled levels can benefit countries, particularly Japan which has suffered from deflation for many years.

Moreover, Japan’s labor market is changing. Japan’s labor union recently won 3.67% pay gains in the latest round of negotiations, the highest in 30 years! With higher disposable income, consumer spending and GDP will improve.

Finally, the Japanese government’s loose monetary policy with interest rates below 0 can successfully sustain inflation while keeping an eye on the inflation levels & high capex plans can improve domestic economic activity.

 

  • Rising Semiconductor sector: The geopolitical scenario is difficult today as tensions are rising between the US and China over Taiwan. However, the situation has become a blessing for Japan. The country is aiming to boost domestic production as its status as a US ally is helping drive investments. Recently, Micron Technology announced an investment of $3.6 billion in Japan to manufacture next-generation memory chips.

 

  • Improved Corporate Governance rules: Shareholder wealth was not a major point of concern for Japanese companies as almost 54% of all listed Japanese companies trade below their book value. Moreover, there aren’t enough buybacks as shareholders had to be content with mediocre returns.

However, the same is about to change as Japan is introducing stricter corporate governance norms which will cater to shareholders, thereby maximizing shareholder value. Moreover, the norms are forcing companies to improve their capital efficiency and untangle cross-shareholdings. Under such rules, Japanese companies paid record dividends in 2022 and announced several buybacks.

 

  • Warren Buffett: Lastly, the interest of famous value investor Warren Buffett in the country is leading international investment. The 92-year-old investor’s company Berkshire Hathaway recently improved its stake in Japan’s Top 5 trading houses by 2%. His bet in the Asian country has more than doubled from $6 billion to $15 billion in 3 years.

Moreover, global interest in Japanese equities is rising as Japan’s market value surged by $518 billion and foreign investors bought stocks worth $15.6 billion in April 2023 alone, the highest in over 60 months!!

 

 

The index has been moving positively since the beginning of 2023. It was making higher highs and higher lows, which are indicative of an uptrend. Although the index made a lower low in March, presumably due to the US Banking Crisis, it resumed its trend as it continues to remain in an upward trend.

Bulls have remained dominant for the majority of May. Even though sellers tried to book profits, robust demand for Japanese equities helped keep the index up in a bullish move. Moreover, sellers tried to take the price down, the bulls regained strength once again as they kept the momentum up. Although there are brief spurts of bearish pressure, bulls are dominant in the market.

Furthermore, due to structural changes, robust capital expenditure, higher wages, weakening yen, and monetary easing, the Japanese economy is expected to perform well while higher dividends & buybacks, improving focus on corporate governance, healthy fundamentals, lower valuations, and higher earnings will continue to garner investors’ interest.

Therefore, the prospects of Japanese equities appear to be Good in the near, mid, and long term.