Japan's Nikkei Hits 40,000 Mark for First Time: What's Driving the Surge and What's Next?
The $Nikkei 225 (.N225.JP)$, which has captured the attention of investors worldwide, has been surging relentlessly following its breakthrough of the 1989 high. On March 4th, the index smashed through the 40,000-point mark for the first time ever, marking a historic milestone.
Last year, the $Nikkei 225 (.N225.JP)$ achieved its largest annual gain in almost a decade, rising 28.24% in 2023, with returns second only to the $Nasdaq Composite Index (.IXIC.US)$ among major global stock indices. Now, just over two months into 2024, the Nikkei 225 has already surged by over 20%, far outpacing the Nasdaq's 8.4% gain during the same period, underscoring a robust upward momentum and lucrative investment potential.
The upward trajectory of Japan's stock market can be traced back to 2013. According to data, the $Nikkei 225 (.N225.JP)$ has accumulated a staggering 295.78% increase from 2013 to 2023, surpassing the return of the $S&P 500 Index (.SPX.US)$ during the same period which stood at 278.9%.
The decade-long bull run in Japan's stock market is the culmination of several factors that have worked in tandem. This includes, among others, the impetus provided by the quantitative easing and negative interest rate policies under "Abenomics", the strides made in corporate governance that have heightened shareholder returns consciousness, Yen depreciation, the significant improvement in profitability of Japanese enterprises, and the inflow of international capital. In addition, Japan pension giant GPIF (Government Pension Investment Fund) expanded its allocation to Japanese stocks, providing robust backing for Japan's stock market and further enhancing its stability and liquidity.
Abenomics is a macroeconomic policy introduced by former Japanese Prime Minister Shinzo Abe in 2012. Its three-pronged strategy, consisting of monetary easing, fiscal stimulus, and structural reforms, is designed to revive an economy that has been stagnant for over two decades. The central focus of Abenomics is the monetary easing policy, which seeks to spur economic growth by boosting the money supply.
In addition to riding the wave of global AI frenzy driving tech stocks, the multiple positive expectations have been the key driver of Japan's stock market hitting new highs since 2024 and may continue to provide further upward potential.
Specifically, these expectations include a potential pay hike in Japan's spring wage negotiations, an improvement in corporate earnings expectations, the relative attractiveness of Japanese stocks compared to global equities, the sustained improvement of Japan's economy, the accelerated inflow of foreign capital into Japan's stock market, a surge of individual domestic investors into the stock market under the new NISA scheme, and further optimization of corporate governance.
1. Japan's Deflationary Woes Eased: Sustained Wage Growth to Drive Reflation
In 2023, Japan's nominal GDP growth rate saw a significant increase compared to the previous two years, with the nominal GDP YoY growth rate showing a remarkable increase over the actual GDP YoY growth rate, indicating a shift from deflation to reflation. Investors are closely watching Japan's spring 2024 wage negotiations, and according to statistics from the Japan Business Federation (Keidanren), the average wage increase for employees in large companies reached the highest level in 31 years, at 3.99%. Continuous inflation has raised people's expectations for wage increases, with Keidanren proposing a target of over 4% wage growth for 2024.
In 2024, Japan is expected to achieve a spiral of rising prices and wages, opening up space for economic growth and corporate profit expectations, and increasing the desire for consumption and investment among the public.
2. Strong Profitability Boosts Share Price Surge
In late February, Morgan Stanley strategists wrote that investors have recognized that Japan's true bull market has been ongoing for some time and is likely to see even greater gains. Strong profits of Japanese companies are a major reason why the market remains optimistic. According to Bloomberg data, the forecasted EPS for the Nikkei 225 index in 2024 is 1736.19 yen, representing a significant increase from 1225.71 yen in 2023, with an expected growth rate of 41.6%.Goldman Sachs also predicts that the latest quarterly earnings of Japanese large corporations are expected to grow by over 40%.
The robust profits of Japanese companies are a combined result of impressive export performance against the backdrop of the yen depreciation and the Tokyo Stock Exchange's active efforts in promoting listed company governance over the years.
1) On the one hand, Japan's prolonged ultra-loose monetary policy has led to long-term weakness of the yen, with the USD/JPY exchange rate remaining strong since hitting a 32-year high in 2022. The yen depreciation has increased the income earned by multinational corporations overseas and strengthened the price competitiveness of Japanese-manufactured products sold abroad, thereby driving strong growth in total company revenue.
2) At the same time, the Tokyo Stock Exchange has actively urged companies to improve their profit statements, with specific measures including the requirement for listed companies to voluntarily propose business plans to improve capital efficiency, and warning that companies that do not effectively utilize their capital may face the prospect of delisting as early as 2026.
3. Attractive Valuation Levels Persist for Japanese Stocks Despite All-Time Highs
Despite breaking historical highs, the valuation of the Japanese stock market remains relatively attractive from several perspectives. Miyuki Kashimathe, Head of Investments, Japan at Fidelity International, pointed out that the forward P/E of Japanese stocks is not expensive compared to other markets, especially given current interest rates. More importantly, the low P/B ratio of Japanese stocks means that these stocks are undervalued relative to the value of net assets on their balance sheets.
Looking at the P/E ratio, the MSCI Japan's forward 12-month PE ratio is only 14.1x, lower than the MSCI Global's 17.4x and the MSCI USA's 20.1x. In terms of the P/B ratio, the MSCI Japan's P/B ratio is currently only 1.37x, far lower than the 4.72x before the burst of the economic bubble. LSEG data also shows that about one-third of the constituent stocks in the Nikkei 225 Index are still trading below their book value, while this ratio is only 3% for the S&P 500 Index.
Toshikazu Horiuchi, a strategist at IwaiCosmo Securities, stated that the fundamental difference between today's Japanese stock market and the bubble economy of more than 30 years ago is that corporate valuations are not overestimated. He further added that as long as companies announce strong performance next quarter, Japanese stocks may rise again after hitting historical highs.
4. Strengthened Share Buyback and Dividend Payouts Showcase Japanese Companies' Focus on Shareholder Returns
As exchanges call on listed companies to focus more on improving stock prices and capital efficiency to increase their attractiveness to investors, more Japanese listed companies are joining the stock buyback trend and increasing dividends to investors. In 2023, the total amount of stock buybacks by Japanese listed companies reached approximately 9.6 trillion yen, reaching a new high for two consecutive years. Amid the rising stock prices, the current trend of buybacks remains very active. The effort to increase shareholder returns was once a topic of great interest to investors in the US stock market, and now the Japanese stock market may also produce similar results, boosting stock prices.
5. Increased Significance of Tech Stocks in Japanese Market Offers Abundant Opportunities to Ride the AI wave
Unlike the dominance of banks and utilities during the bubble economy of 1989, as of early 2024, technology companies make up approximately 50% of the weight in the Nikkei Index. This is partly a result of the rise of Japanese technology stocks and semiconductor sectors amid the continued AI wave, and also means that the current Nikkei 225 Index is expected to benefit more from investment opportunities brought about by the strong demand for AI worldwide. Chip-related companies such as Advantest and Tokyo Electron are expected to further boost the index.
6. Accelerated Inflows: More Capital from Overseas and Domestic Individual Investors Likely on the Way
Against the backdrop of the continuous depreciation of the yen and the momentum created by Warren Buffett's investment in Japan's five major trading companies, foreign capital continues to pour into the Japanese stock market. Bloomberg data shows that from the beginning of this year until February 22, foreign funds accounted for about two-thirds of the trading volume on the Tokyo Stock Exchange.However, according to the Nikkei News, the cumulative net buying by foreign investors is still far below the peak in 2015.There is still more room for foreign active capital to be allocated to the Japanese stock market, and more funds may be on the way.
On the domestic front, Prime Minister Fumio Kishida's push for the new NISA (Nippon Individual Savings Account) officially began in 2024, reinforcing the country's efforts to encourage a shift from savings to investments in the equities market. Compared with the original NISA, the Tsumitate Quota (formerly the Tsumitate NISA) and the Growth Quota (formerly the General NISA) have been expanded to 3.6 million yen, and the tax-free period has been eliminated, allowing investors to buy and sell repeatedly within a certain amount without paying capital gains tax. In addition, the investment scope of the new NISA has been expanded to include stocks and stock-type investment trusts, and both dividends and gains from selling stocks can enjoy tax-free treatment. The implementation of the new NISA is significant for the Japanese stock market, as it is expected to effectively stimulate the enthusiasm of individual investors to participate in the stock market, open up a lot of potential funds flowing into the stock market, and further promote stock market growth.
Despite various driving factors behind the continued upward trend of Japanese stocks, there are still underlying risks, such as the potential end of negative interest rates this year and economic downturn. Furthermore, the bursting of the AI-related bubble and profit taking could significantly drag down Japanese stocks.
Source: Nikkei Asia, Reuters, Japan times, Bloomberg, Investopedia
By Moomoo News Irene
By Moomoo News Irene
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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