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Will Nikkei scale an all-time high?

January 15, 2024
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Employees work at the Tokyo Stock Exchange (TSE), operated by Japan Exchange Group Inc. (JPX), in Tokyo, Japan, on Thursday, Jan. 4, 2024.

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After a tumultuous start to the year, Japan’s benchmark Nikkei 225 broke past the 35,000 mark for the first time since February 1990 and has been scaling new 33-year highs.

The rally in Japan’s equity market, which started on Jan. 5, has also seen the broad-based Topix hitting 33-year highs.

How long will this run last? Could the Nikkei cross its all-time high of 38,195 hit in December 1989?

Speaking to CNBC, Yeap Jun Rong, market strategist at IG Asia struck an optimistic tone, saying that “all stars seem to be aligned for Japan’s stock market.”

He said that subdued wage data and weaker household spending allow the Bank of Japan to maintain its ultra-accommodative policies for longer, boosting the country’s markets.

It allows equities to “continue basking in this supportive policy environment,” Yeap said, adding stocks have more upside to them due to several longer-term tailwinds including the corporate governance measures by the Tokyo Stock Exchange.

Among the steps TSX has taken is directing companies to “comply or explain” if they are trading below a price-to-book ratio of one — an indication a company may not be using its capital efficiently. CNBC

The exchange warned such companies could be delisted as soon as 2026.

In a note last week, the Bank of America called the Japan rally a “déjà vu,” comparing it with the Nikkei’s rise between April and June 2023.

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Will Nikkei scale an all-time high?

“We see many similarities too with last year’s rally,” the BofA’s analysts said, adding that one factor that started last year’s rally was the highest Shunto wage hike in 30 years.

In 2024, the Shunto negotiations look increasingly likely to bring even higher increases, with one large company after another announcing sharp wage increases over the last few weeks.

The “cost-push inflation has been weakening, and if real wages start rising it will likely have a substantial market impact,” according to BofA.

Yeap also attributes the market rally to investor hopes that Japan will break free from its deflationary cycle, as well as benefit from supply-chain diversification amid the souring US-China relationship.

The weak yen has also played a part in fueling inflows into Japan from overseas investor funds. Morningstar Fund Research revealed that net inflows to Japanese equity funds rose to 320 billion yen in December from 70 billion yen in the previous month. Net outflows from passive funds also decreased from 180 billion yen to almost zero.

“Although it has strengthened somewhat recently, the yen has weakened further on the market’s view that BoJ’s exit from NIRP will be delayed,” BofA analysts said, referring to the Bank of Japan’s negative interest rate policy.

On the technical front, while BofA thinks that the valuation of the Japanese markets are “not yet stretched,” they are not as cheap as they were in the April to June run up

As such, equities may not have as much upside room, although the analysts do not rule out a further rise. The median price-to-earnings ratio is currently at 14x, compared with the peak of 14.5x.

Yeap cautions that near-term overbought technical conditions “may call for a short-term breather for the index, the prevailing upward trend will likely persist, with the Nikkei 225 index potentially setting its sight to retest its 1990 high over the coming months.”

On Monday the Nikkei rose 0.62%, while the Topix gained 0.84% even as other markets in Asia were subdued.

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