TOKYO, Japan – Japanese stock markets have seen significant gains, with the Nikkei and Topix both outperforming in the Asia Pacific region, marking their best annual gains in over a decade. The Nikkei 225 and Topix have surged more than 25% in 2023 and are up more than 10% so far in 2024. This significant performance can be attributed to Japan Inc’s solid third-quarter corporate earnings, prompting Bank of America equity strategists to upgrade their 2024 year-end forecasts for the Nikkei 225 and the Topix. The rally has also been supported by a weaker yen, which has dropped about 6% against the dollar so far this year, signaling a potential drop to 33-year lows.
Investors have been pouring funds into Japanese equities, encouraged by Warren Buffet’s bullish calls on Japan and the Japanese government’s push towards greater corporate governance reforms. Foreigners have invested more than 2 trillion yen in the Tokyo Stock Exchange’s “prime” offerings in January, according to data from the exchange.
Furthermore, Nikkei reported that net profits of listed companies in Japan for the fiscal year ending March 2024 could reach a record high for the third consecutive year. This comes on the back of record quarterly earnings for the October-December period, indicating a 45% increase from the same period a year earlier, and 14% higher than consensus estimates. Toyota, the world’s largest car manufacturer, has also upgraded its earnings forecast, projecting a bigger profit margin and stronger revenue.
Recent gains in the stock markets have come alongside the weakening of the Japanese yen to 150.40 against the dollar, driven largely by the divergence between high U.S. interest rates and Japan’s ultra easy policy. Japanese Finance Minister Shunichi Suzuki expressed his concern on the weakening yen, stating that he was watching the currency’s moves with a sense of “urgency.”
While the yen’s chronic weakness has boosted some of Japan’s exporters, it has impacted the purchasing power of consumers in Japan. Additionally, the Bank of Japan has maintained the world’s last negative rates regime despite “core core inflation” exceeding its 2% target for more than a year. Market participants expect the BOJ to move away from its negative rates regime at its April policy meeting once the annual spring wage negotiations confirm a trend of meaningful wage increases. The central bank believes wage increments would translate into a more meaningful spiral, encouraging consumers to spend. However, prolonged high inflation rates have hit domestic consumption, resulting in Japan’s GDP shrinking for a second consecutive quarter and ceding its place as the world’s third-largest economy to Germany.