Pedestrians pass by an electronic board displaying the closing numbers of the Tokyo Stock Exchange. ... [+]
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The Japanese stock market had an extraordinary 2023 in several respects. The benchmark Nikkei 225's 28% gain last year was its fastest expansion in a decade, while it ended the year at 33,464.17, the highest since the decline 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 stocks are likely to continue their strong performance in 2024 thanks to broadly favorable market and regulatory conditions, as well as support from some high-profile investors.
Solid fundamentals
Key regulatory reforms in Japan's capital markets bode well for stock performance in 2024. Of particular importance is Japan's decision to incentivize publicly traded companies to increase valuations and profits, with the possibility of delisting companies that do not demonstrate efficient capital allocation. Another sign of better corporate governance is the dissolution of Japanese companies' cross-shareholdings: shares that companies own in their business partners to maintain those relationships.
"The TSE's continued pressure on companies to respond to its requests will lead to a further acceleration of corporate governance-related activity among listed Japanese companies in 2024." Goldman Sachs Research said strategists Bruce Kirk and Kazunori Tatebe in November.
Some of the world's biggest institutional investors are bullish on Japan. The greatest of them, Black Rock
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The Buffett Factor
It's impossible to prove that Warren Buffett's optimism about Japanese stocks boosted the performance of the Japanese stock market last year, but we can say with a high degree of certainty that it hasn't hurt. Following Buffett's interview with Nikkei Asia in April – in which he extolled the virtues of investing in Japan – the Japanese stock market recorded 10 consecutive weeks of net foreign buying in cash and futures, totaling 7.9 trillion yen (53 billion dollars).
Meanwhile, Buffett's favorite Japanese companies, Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., Marubeni Corp. and Itochu Corp., rose 20% after he said in April that he was looking to increase his exposure to them to 7 .4%, adding that Berkshire Hathaway
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"I was confused by the fact that we could buy stakes in these companies," Buffett said. CNBC in April. Indeed, they had “an earnings yield of maybe 14% or something like that, but the dividends would grow.”
Looking ahead, Buffett could next target Japanese banks and insurers. The legendary investor likes businesses that could be described as “boring,” but that also have attractive valuations and solid fundamentals. So, not so much tech startups and cryptocurrencies, but Japanese financial firms, quite possibly.
Rational exuberance
There are certainly some caveats for Japanese stocks this year, largely macroeconomic in nature. The yen is expected to appreciate this year as the US Federal Reserve plans to cut the benchmark interest rate, while the Bank of Japan is likely to reduce its negative interest rate policy. A stronger yen could weigh on stock prices, especially those of major electronics and automobile companies.
That said, we believe Japanese stocks will ultimately be able to overcome any headwinds from a stronger yen as corporate earnings are expected to continue improving this year. Nomura Securities estimates that publicly traded companies will post 8% growth in 2024 led by gains in semiconductors and related electronics.
Meanwhile, analysts surveyed by Reuters They forecast the Nikki will continue to recover through 2024 and reach a 30-year high 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 Japanese stocks to continue rising this year amid strong economic growth. So-called “value stocks” are worth keeping a close eye on, a cohort that looks cheap given fundamentals and has rallied around 30% in 2023. Value stocks are likely to get a boost in 2024 thanks to strong growth. projected 3% to 4% nominal growth in the Japanese economy and the Tokyo Stock Exchange's efforts to improve returns on capital.
Finally, another variable that could boost Japan's stock market this year would be to publicly name companies that have outlined capital improvement plans, an idea first floated in October by Tokyo stock exchange operator Japan Exchange Group. Inc, and is expected to be implemented this year.
Although revealing the names of these companies could involve more costs for them, investors would respond positively to the concrete effort to reveal important information.
