Published on: 2023-11-23
The Nikkei 225 steadied above 33,000. Tokyo's benchmark briefly hit a high not seen since 1990 on Monday as Treasury yields and the dollar began to lose ground this month.
Japanese equities have delivered 30 years of false dawns, but it has become a sought-after with Buffett’s stamp of approval. Berkshire Hathaway has racked up lucrative profits since building the trading house stakes.
The company just sold yen bonds a second time this year, sparking speculation that the legendary investor is looking to scoop up more Japanese shares.
The market is by far one of the best performers globally, but half of the listed Japanese companies still trade at below book value, and in aggregate hold 20% more cash than their market cap.
The rally was partly driven by a robust earnings season. Japanese corporations reaped the benefits of a weaker yen and from passing on costs to consumers.
Insatiable appetite
Analysts say upward revisions to Japan's corporate earnings outlook are supporting share prices. The index will continue its torrid rally this year into 2024, according to a Reuters poll.
The median forecast for the Nikkei's level in mid-2024 was 35,000, with responses ranging from 31,143 to 39,500 but some stagnation is expected for equities in the latter half of next year.
Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management in Tokyo, forecast the Nikkei to reach 39,500 in June and 40,900 by end-2024.
The most bullish forecaster pointed to pent-up demand in both business investment and consumer demand, particularly for services, which will drive EPS growth.
Many respondents suspect the yen may have bottomed out with the BOJ approaching the end of super-accommodative stimulus and the Fed tightening cycle peaking out.
Net inflows to Japan hit ¥946.3 billion last month, the largest amount this year and closing in on the record high last December, according to Morningstar Direct data.
Equity funds in particular recorded strong momentum as both Japan equities and world equities more than doubled their net inflows compared with June.
Profit-taking reasons
Not all money managers adopt the buy-and-hold strategy like Buffett, so overseas capital could take their money off the table anytime if the rally looks markedly overstretched.
Companies that missed analyst forecasts since the start of the current fiscal year in April have seen share-price drops of about 6%, more than the average over the past decade, according to an analysis by Rie Nishihara, chief Japan equity strategist at JPMorgan.
"There was a bit of overreaction to superficial earnings numbers” due to those who are not familiar with the market, said Masashi Akutsu, chief equity strategist at BofA Securities.
Policy normalisation is also keeping investors on tenterhooks. Japan's big employers are going to keep up salary rise in 2024, adding to pressure on the BOJ to act sooner than later.
Rengo, Japan's largest trade union confederation, said it would demand a pay hike of "5% or higher" next year. Meanwhile Kishida has been pushing for pay hikes with his approval ratings plunging.
That means the tailwinds for Japanese multinationals from a weaker yen could start to dissipate. And the BOJ will have to reduce its bloated balance sheet eventually.
The central bank became the biggest owner of Japanese shares in late 2020 through its aggressive asset purchase programme, so it holds a massive amount to be offloaded.
“Selling J-REITs and ETFs could trigger a big shock in financial markets,” Yamaoka, the former BOJ official, said. “It’s going to be tough to exit in that way during Governor Ueda’s tenure.”
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