Japanese stocks have closed the year with their most significant annual gains in a decade, driven by a combination of factors including a weak yen, corporate governance reforms, and indications of sustained inflation that attracted investors. The benchmark Topix achieved a remarkable annual return of 25%, while the Nikkei 225 Stock Average surged by 28%. These are the best performances for both indexes since 2013 when aggressive monetary and fiscal easing policies fueled optimism for an economic turnaround in the third-largest global economy.
Ending the year near levels last seen in 1990, these world-leading indexes benefited from investors seeking alternatives to Chinese equities and the Japanese government’s efforts to encourage companies to enhance their value. The depreciation of Japan’s currency also contributed to increased profits for exporters, particularly automakers. Warren Buffett’s renewed endorsement further propelled shares of trading houses to record highs.
Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd., remarked, “Japan’s stock rally this year is really quite meaningful. It’s a sign that we’re finally returning to a normal situation, a non-deflationary environment where the Bank of Japan’s monetary policy easing has likely supported the market.”
Heading into 2024, investors may maintain an optimistic outlook as the yen remains relatively inexpensive, and corporate earnings show resilience to foreign exchange fluctuations. However, some caution is warranted due to near-term risks associated with subdued consumer spending and indications that yen weakness may be reaching a plateau.
On the final trading day of the year, the Topix recorded a 0.2% gain, while the Nikkei 225 slipped 0.2%.
While Japan’s equity gains outpaced its Asian peers this year, with the MSCI Asia-Pacific Index rising by less than 9%, concerns lingered over a slowdown in Chinese growth, geopolitical tensions, regulatory risks, and fears of state intervention in the world’s second-largest economy.
This year’s rally mirrors the optimism seen in 2013 when the Topix surged by 51%, driven by Prime Minister Shinzo Abe’s economic policies known as Abenomics. Although optimism waned in subsequent years, particularly due to the impact of the Covid-19 pandemic on Abe’s goal of ending deflation, there are now positive signs of sustainable inflation, surpassing the central bank’s 2% target for over a year and a half.
Financial stocks, in particular, have benefited from optimism regarding potential improvements in banks’ lending margins. This sector has outperformed the broader Topix since the Bank of Japan’s surprising move to ease its grip on yields just over a year ago, sparking speculation about the end of the world’s last negative interest-rate regime.
