Pedestrians walk across Shibuya Crossing in heavy traffic.
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Both the Nikkei and the broader Topix have been standout outperformers in Asia-Pacific, gaining more than 10% so far this year after rising more than 25% in 2023 – their respective best annual gains in at least one Decade.
Japan Inc.'s solid third-quarter corporate earnings prompted Bank of America equity strategists to raise their 2024 year-end forecasts for the Nikkei 225 to 41,000 from 38,500. They increased their forecasts for the Topix from 2,715 to 2,850.
The rally has also been helped by a weaker yen, which has lost about 6% against the dollar so far this year and appears on track to fall to the 33-year low hit late last year.
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Nikkei since December 1989
Investors have poured money into Japanese stocks, heeding Warren Buffet's bullish calls for Japan and cheering the Japanese government's push for major corporate governance reforms – aimed at forcing Japan Inc. to boost returns for shareholders.
Data from the Tokyo Stock Exchange showed that foreigners invested more than 2 trillion yen in the exchange's “prime” offerings – its largest and most liquid stocks – in January.
Nikkei reported last week that net profits of listed companies in Japan for the fiscal year ending March 2024 could hit a record high for the third consecutive year.
This comes on the back of record-breaking quarterly earnings for the October-December period, which rose 45% from the same period last year and were 14% above consensus estimates, according to analysts at Goldman Sachs.
Toyota, the world's largest automaker, was among several Japanese companies that raised their profit forecast, which calls for a larger profit margin and higher sales.
Recent gains in equity markets have come against a backdrop of a weakening Japanese yen, which was last at 150.40 against the dollar, largely due to the divergence between high U.S. interest rates and Japan's ultra-loose policies.
Japanese Finance Minister Shunichi Suzuki was the latest in a series of government officials to express concern about the weakening yen on Friday, reportedly saying he was watching the currency's moves with a sense of “urgency.”
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Japanese Yen/US Dollar
While the yen's chronic weakness boosted some Japanese exporters, it also reduced the purchasing power of Japanese consumers.
Yet the Bank of Japan has maintained the world's last negative interest rate regime, even though “core inflation” – which excludes food and energy prices – has exceeded its 2% target for more than a year.
Market participants expect the BOJ to move away from its negative interest rate regime at its policy meeting in April once annual wage negotiations in the spring confirm a trend toward significant wage increases.
The central bank believes that wage increases would lead to a more sensible spiral and encourage consumers to buy.
But persistently high inflation rates have hurt domestic consumption – a key reason Japan's GDP contracted for the second straight quarter, confounding analysts who had expected modest growth in the Japanese economy. It also meant that Japan ceded its place as the world's third largest economy to Germany.