Outlook 2024: Tailwinds, domestic events to sway Japanese equities
Japanese equities scaled impressive heights in 2023, with the TOPIX and the Nikkei Stock Average (Nikkei) indexes reaching their highest levels since 1990.
As of December 15, the Nikkei was up 28.21% since the start of the year, while the TOPIX was up 24.84%.
After such a tailwind year, it is worth looking at the probability that this continues in 2024. At Nikko Asset Management, the expectation is a year of domestic consolidation and long-term reform measures, where markets are driven more by Japan-specific events than by global factors.
“After decades of deflation, we see Japan as finally breaking out of this cycle in 2024, as it enters a virtuous cycle of price increases and wage hikes,” Junichi Takayama, investment director at Nikko Asset Management, told AsianInvestor.
In 2023, Japan’s inflation was largely supply-side driven, influenced by global factors such as higher commodity prices, Takayama explained. In 2024, he anticipates an important shift from supply-side inflation to a more balanced scenario where demand-side factors, such as wage increases and consumer spending, begin to play a more significant role.
“Japanese Prime Minister Fumio Kishida’s “new form of capitalism” agenda considers wage hikes critical to boosting consumption, thereby allowing firms to hike prices, and he urged heads of business and trade unions to raise wages next fiscal year,” Takayama said.
This echoes the sentiments of the Bank of Japan (BOJ), which has stressed that durable inflation must accompany sustained wage gains before it takes concrete steps towards policy normalisation. The government is also pressing customers of SMEs to accept price hikes, which are critical since SMEs tend to not be as profitable as large companies, with less room for wage hikes.
THE YEN AND THE DOLLAR
Sustained wage increases are an important factor in 2024, according to Kensuke Niihara, chief investment officer for Japan at State Street Global Advisors.
He believes sustained wage increases are a key factor for inflation, consumer spending, the normalisation of monetary policy, and corporate profitability in Japan.
“We should also keep an eye on the depth of the US economic slowdown and Japanese yen appreciation. We expect upside pressure to the yen in 2024, given the cheap valuation of the yen and possibly opposite monetary policy direction between the Fed and the BOJ,” Niihara told AsianInvestor.
If the US economy achieves a soft-landing as the market currently expects, a reasonable level of yen strength can make Japanese equities more appealing to overseas investors who suffered from yen weakness in 2023.
“However, if the Fed needs to cut rates aggressively, it will potentially push the yen much higher and affect the Japanese equity market negatively. Like many other markets, the Japanese market would not be unmuted from the US and global recession,” Niihara said.
A TOUGHER APPROACH
Niihara pointed out the Tokyo Stock Exchange’s call for companies to improve corporate governance and capital efficiency.
“We believe this upward trend in 2023 will continue into 2024. However, we are not yet fully confident whether it is sustainable in the long term,” he said.
From January 2024, the Tokyo Stock Exchange will be taking a tougher approach to monitoring and incentivising corporate compliance by publishing a list of companies complying or not complying with its initiatives. At Nikko Asset Management, Takayama expects this transparent reporting to help investors and stakeholders to track the progress of individual companies.
While there was a stock rally in 2023, Japanese value stocks — especially in the small and mid-cap space — are still trading at significant discounts and have room to move much higher in 2024, he pointed out.
“By focusing on these undervalued stocks, investors stand to benefit from substantial price appreciation as these stocks move closer to and above their intrinsic book values. Investment teams with analysts watching this space are well positioned to unlock this value,” Takayama said.