Japan’s equity market witnessed one of the most significant rallies this year, with the Topix index and the Nikkei 225 Stock Average reaching 33-year highs and posting gains exceeding 20% for 2023. This surge outpaced most equity benchmarks in Asia, driven by a depreciating yen against major currencies and indications that the Bank of Japan remains committed to its ultra-loose monetary policy.
Factors Contributing to the Rally: Japanese automakers and electronics companies saw substantial gains, with a surge of at least 33%, attributed to the yen’s depreciation. The Bank of Japan’s cautious approach to policy changes further fueled optimism. Despite a recent yen rally, Japanese stocks could maintain strength due to the currency’s relative affordability and corporate earnings resilience against foreign exchange fluctuations. Foreign investors also welcomed Japan’s efforts to enhance companies’ shareholder value.
Masashi Akutsu, Chief Equity Strategist at BofA Securities in Tokyo, noted, “Investors outside of Asia are also interested in Japanese equities. If they are convinced that Japan will improve, they will raise their rating, and then funds will come in line with the fundamentals.”
Foreign Investment Trends: Foreign investors were net sellers for only three months in 2023 as of November, according to Tokyo Stock Exchange data, indicating sustained interest from overseas. Notable sector winners included trading companies, buoyed by Warren Buffett’s increased stake in the sector, while pharmaceutical companies faced setbacks after clinical trials.
Sector Highlights:
1. Semiconductors:
- Screen Holdings Co. surged 172%, a top performer in the Nikkei 225.
- Advantest Corp. and Renesas Electronics Corp. both doubled.
- Semiconductor-equipment suppliers gained attention amid potential new plants and signs of a recovery.
2. Automakers:
- Yen depreciation in November propelled exporters to record earnings.
- Car companies’ subindex gained 36%, with Toyota Motor Corp. on track for its best year since 2013, boasting a 40% gain.
3. Trading Companies:
- The five trading firms favored by Buffett (Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., Marubeni Corp., and Itochu Corp.) rose at least 35%.
- Berkshire Hathaway Inc.’s yen bond sale in November drew attention to potential future investments.
4. Pharmaceuticals:
- Pharma sector faced challenges, with Sumitomo Pharma Co. seeing a significant decline.
- Companies like Eisai Co. faced setbacks in clinical trials.
- Investors advised to be selective in the healthcare sector, focusing on companies with promising late-stage pipelines.
In conclusion, Japan’s 2023 equity rally, fueled by a weak yen and foreign demand, holds the potential for an extension into 2024. Foreign investors’ optimism, coupled with sector-specific trends, indicates a positive outlook for Japanese stocks, despite potential challenges in certain industries.
