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IF Insights: Investors bullish as Japan’s Nikkei registers massive peaks

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London Stock Exchange data showed that one-third of Nikkei 225 companies trade below book value, compared to 3% for the S&P 500

Many were apprehensive about Japan’s future after the assassination of the island nation’s former Prime Minister Shinzo Abe. Abenomics had been keeping Japan’s economy intact ever since the Japanese stock market and real estate bubbles broke in 1992. The nation saw a period of negative inflation and wage and growth stagnation that lasted for over 30 years.

Deflation incentivised savings and Japanese people were hesitant to spend as commodities got cheaper. It was difficult to get people to invest in the saturated Japanese markets. There was immense pressure on the current Prime Minister Fumio Kishida to revive the Japanese economy and his ‘New Capitalism’ policies were greatly criticised and are still debated.

Despite it all, Nikkei 225 reached a new all-time high for the third straight trading day on February 27, 2024, closing at 39,239.52. Meanwhile, the Tokyo Stock Price Index (Topix) slightly increased to 2,678.46, the highest level in 34 years. It is an indication of the Japanese economy’s forward momentum and perhaps of the success of Kishida’s economic policies.

However, the Japanese yen has underperformed, losing 6% vs the US dollar. It was trading close to its post-1990s low of 152 to the US dollar. The Tokyo Stock Exchange (TSE) has promoted greater governance, share buybacks, smaller cross-holdings, and higher dividends to reform conservative accounting standards.

As of December 2023, 78% of TSE’s Prime Market category, which includes 1,657 companies with market capitalisations over 100 billion yen (USD 666.67 million), traded below 1 and had plans to optimise capital utilisation and boost stock prices.

The disparity in interest rates has allowed foreign investors, like those holding US dollars, to purchase Japanese company stocks. Investor demand has increased even more as a result of the Japanese listed businesses’ robust profit growth and attractive values.

Optimism Ahead?

Experts predict that Japanese stocks will continue to be appealing since Tokyo is promoting corporate governance changes that should increase value.

As more foreign businesses want to diversify away from China and increase their skills in strategically important industries like semiconductors, including strengthening their ties with Japanese businesses, global supply trends are also favouring the former third largest economy of the world.

Its advances, in contrast to those of Western markets, are driven by underlying profitability from the nation’s blue-chip companies rather than startup froth or AI craze. These weren’t outcomes that Abe’s years of whip-cracking objectives could produce. SMBC Nikko Securities predicts that the profits of firms listed in Tokyo will set a record for the third year in a row.

Warren Buffett stated in his annual letter that Japanese companies’ shareholder-friendly procedures are “much superior” to the ones in the United States. The billionaire bought large holdings in five Japanese trading businesses in 2020 as an early believer. Buffett reported USD 8 billion in investment gains.

Miyuki Kashima of Fidelity said the TSE’s publication of businesses that disclosed plans boosted governance.

“Ultimately, structural change driven by such reforms will help to optimise capital allocation, while a shift to moderate inflation is supportive of growth in wages and investment,” she stated further.

London Stock Exchange data further showed that one-third of Nikkei 225 companies trade below book value, compared to 3% for the S&P 500.

Through buybacks, Japanese shareholders are obtaining greater yields than the headline dividend yield due to these measures.

MSCI Japan’s dividend yield was 2.23, more than MSCI World’s 1.9. ETF manager WisdomTree reported that MSCI Japan’s shareholder yield, which includes dividends and share buybacks, was 3.34, higher than MSCI World’s 2.91.

Foreign investors invested 6.3 trillion yen in Japanese equities in 2023 due to attractive values. Most observers feel outsiders undervalue Japan.

Through a tax-exempt Nippon Individual Savings Account (NISA), Japanese households are investing in stocks.

Trump Trades

Japanese brokers are now focused on stocks that will benefit if Donald Trump wins and the United States-China relationship worsens. Global interest in Japan’s rising equities markets is rising.

Nomura, Japan’s largest brokerage, produced a strategy note in February 2024 identifying more than 50 companies that analysts believe might profit if decoupling accelerates, Trump delivers hefty tax breaks, and Chinese corporations stay unwilling to invest.

After Trump announced that he would impose tariffs on China that could exceed 60% and pledge reforms to “completely eliminate” US dependence on China in critical areas, Nomura’s research, which its author said had drawn strong interest from fund managers, was published.

In another paper, Japanese investment major Daiwa Securities examined the likelihood of a Trump victory and its potential impact on Tokyo-based stocks, arguing that Washington would likely be tougher on China.

Brokerages are utilising additional techniques to attract worldwide investors to a soaring Japanese stock market as the Nikkei 225 and Topix indices approach all-time highs hit in December 1989.

Japan’s government and corporations are discreetly preparing for a Trump victory in November 2024. Three ministry officials told the Financial Times that they had convened “What if Trump?” sessions to prepare for his presidency.

Nomura’s list of winners from increased US-China decoupling, a geopolitical outcome many of the Japanese corporate sector dreads, focuses on companies with sales skewered toward the US.

Subaru, Kikkoman, Komatsu, and Toyo Suisan, a maker of cheap ramen noodles that have become popular in the US as inflation rises, are included.

“It is not just a matter of China’s economic cycle, it is about the uncertainty that would arise from a Trump victory. If the US-China trade relationship becomes more uncertain, Chinese companies will find it harder to invest,” said Nomura chief equity analyst Yunosuke Ikeda.

Ikeda said the latest Japanese earnings season and forward projections showed the possible impact of United States-China decoupling.

Companies with increased US sales outperformed consensus predictions, but those exposed to Chinese consumer demand and the investment cycle reported disappointing results.

Although the Chinese economy’s stagnancy contributed to that divergence, Ikeda said US-China decoupling will remain a big danger for Japanese companies.

Even as geopolitics divide Washington and Beijing, many globalised Japanese companies can navigate US and Chinese marketplaces.

However, decoupling strains those talents and could help US-heavy earnings-based companies like Seven & I, Taiheiyo Cement, Sony, and Kyocera, Nomura noted.

Kishida’s economic policy will emphasise human resources, science and technology, innovation, start-ups, and green and digital transformation to generate growth. The Japanese Cabinet will soon approve the action plan and mid-year economic policy framework.

Some lawmakers believe the Prime Minister may call a quick election to cement his power.

The Liberal Democratic Party (LDP) and its little ally Komeito are unlikely to lose to disorganised opposition parties, but a poor election performance could cost Kishida his job.

Given high inflation and a labour shortage, cautious Japanese corporations offered yearly wage raises of more than 3% at 2024’s wage talks to attract workers.

Kishida’s government is pressuring Japanese companies to raise wages and boost employment flexibility. The government wants minimum wages to reach 1,000 yen this year, up from 961. Only time will tell if Kishida can usher in a new golden dawn for the Japanese people but for now, the far-eastern economy is a paradise for investors.

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