Japan’s Nikkei 225 surged to an all-time high on Thursday, propelled by robust corporate earnings and measures aimed at enhancing investor returns, igniting a fervent rally in Japanese equities this year.
Reaching 38,924.88, the Nikkei 225 eclipsed its previous record peak of 38,915.87 set in 1989, signaling the resounding strength of Japanese stocks. Both the Nikkei and the broader Topix have emerged as standout performers in the Asia Pacific region, boasting gains of over 10% since the beginning of the year following a remarkable surge of more than 25% in 2023, marking their most impressive annual upswings in over a decade.
The formidable corporate earnings of Japan Inc. in the third quarter have prompted Bank of America equity strategists to revise upward their year-end projections for the Nikkei 225 to 41,000 from 38,500. Similarly, they raised forecasts for the Topix to 2,850 from 2,715, reflecting the bullish momentum in the Japanese equities market.
Fueling the rally is a depreciating yen, which has depreciated approximately 6% against the dollar this year, edging closer to 33-year lows observed late last year. Investors have been drawn to Japanese equities, inspired by Warren Buffet’s optimistic outlook on Japan and bolstered by the Japanese government’s concerted efforts to enact corporate governance reforms aimed at stimulating shareholder returns.
Data from the Tokyo Stock Exchange revealed that foreign investors injected over 2 trillion yen into the exchange’s “prime” offerings, comprising its largest and most liquid stocks, in January.
Notably, Nikkei reported last week that net profits of listed companies in Japan for the fiscal year ending March 2024 could achieve a record high for the third consecutive year. This surge follows record quarterly earnings for the October-December period, which surged 45% from the corresponding period a year earlier and surpassed consensus estimates by 14%, according to Goldman Sachs analysts. Toyota, the world’s largest car manufacturer, was among several Japanese companies that upgraded their earnings forecast, anticipating a more substantial profit margin and increased revenue.
The buoyancy in stock markets coincides with a weakening Japanese yen, currently trading at 150.40 against the dollar, driven by the disparity between high U.S. interest rates and Japan’s accommodative monetary policy stance. While the yen’s persistent depreciation has benefited Japanese exporters, it has dampened consumer purchasing power domestically.
Japanese Finance Minister Shunichi Suzuki expressed concern over the yen’s depreciation on Friday, underscoring the urgency of monitoring currency movements. Despite core inflation surpassing the 2% target for over a year, the Bank of Japan has retained its negative interest rate policy, the last of its kind globally.
Market observers anticipate the BOJ to transition away from negative rates at its April policy meeting, contingent upon meaningful wage increases observed during the annual spring wage negotiations. The central bank anticipates that wage hikes will translate into a substantive economic upturn, stimulating consumer spending.
However, persistent high inflation rates have dampened domestic consumption, contributing to Japan’s second consecutive quarter of GDP contraction, defying analyst expectations of a modest economic expansion. Consequently, Japan relinquished its position as the world’s third-largest economy to Germany.
