This photo taken on May 2, 2024 shows a panoramic view of the entrance to the Tokyo Stock Exchange (TSE) headquarters building in the Nihonbashi area of Tokyo.
Richard A. Brooks | AFP | Getty Images
Japanese stocks are outperforming in 2024.
February national benchmark Nikkei 225 Index Breaking through the 1989 high.
This week, the Nikkei and the broad-based Topix surpassed previous records on Thursday to hit new all-time closing highs. The Topix in particular broke the 34-year record set in December 1989.
How did the market reach such levels, especially with the Nikkei hitting a new high for the second time this year?
Jesper Koll, expert director at Tokyo-based financial services firm Monex Group, told CNBC that profit-making is the only driver of the current market rally.
“Corporate Japan is now benefiting from decades of operational restructuring,” Cole said. “Break-even points are at record lows in the world, so even minimal revenue growth can lead to explosive profit growth,” he added. .
He expects profits to grow 35% over the next two fiscal years (April 2024 to March 2026), with revenue growing 4% annually.
His forecast stems from predictions that Japanese companies will see domestic and global sales growth, explaining that his forecast of 4% sales growth is due to wage increases announced by Japan’s largest union on Thursday.
Japan’s largest labor union, commonly known as Rengo, announced that Japanese companies have Achieve the largest salary increase in 33 years This year.
Monthly wages for union-backed workers will rise by an average of 5.1% in the fiscal year ending in March 2025. It rose 4.45%.
“For example, the salary increase will not reach 5%, and the increase in item sales will not be less than 4%,” he pointed out.
More importantly, Cole said, Japan is a “bastion of stability.” He pointed out that China’s monetary, fiscal and regulatory policies are stable and growth-promoting, and are an important support for the financial market.
When the Nikkei topped the 40,000 mark in March, Cole told CNBC at the time that it was “completely reasonable” for the index to top 55,000 by the end of 2025.
“I stand by my forecast that the Nikkei 225 is expected to climb to 55,000 by the end of next year,” Cole told CNBC this week.
If his prediction comes true, it would be a 37% gain from the 40,000-point mark.
Previously, Cole had predicted that the Nikkei would exceed 40,000 points within 12 months from July 2023.
How sustainable is this rally?
The most important question, however, is: how long can this rebound last?
A report from Nomura Securities on Thursday said gains in the Nikkei and Topix seemed unsustainable. Analysts believe this is caused by short covering in futures.
But there’s a caveat.
“These hasty gains could continue if corporate earnings surprise from April to June looks likely, or if Japanese stocks see more long-term inflows,” they said.
Nomura Securities said futures will have a “significant impact” on stock trends in Japan in the short term, noting that foreign securities firms’ net short interest in futures reached 17,000 contracts as of June 28.
Nomura estimates that if these short positions are unwound, the Topix would rise about 2% to 3% from June 28 levels. According to their calculations, the Topix Index will be around 2,875 points and the Nikkei 225 Index will be around 40,600 points.
Both indexes have since beaten Nomura’s estimates, albeit not by much.
“We will be watching to see if domestic equity investment trusts/ETFs listed in Japan and ETFs listed in the U.S. (which have been experiencing outflows) start to see an increase in inflows,” analysts at Nomura Securities said.
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