Analysts are cautioning that Japanese shares face a series of hurdles in early 2024, potentially hindering their climb to the three-decade highs achieved earlier in the year. The outlook is shaped by concerns such as a stronger yen, subdued consumer spending, concentration of investors in a limited stock range, competition from global markets, and domestic political instability.
Analyst Views and Projections
Nomura Holdings Inc. chief strategist Naka Matsuzawa anticipates a roughly 5% decline in Japan’s equities over the next six months. Meanwhile, JPMorgan Chase & Co. and Saxo Markets analysts foresee a slowdown in stock gains, projecting an increase of 5% to 10% in the coming year after a robust 20% surge in benchmark indexes throughout 2023.
Despite these cautionary sentiments, a Bloomberg survey indicates an optimistic midyear scenario, with the Nikkei 225 index expected to reach fresh three-decade highs.
Key Short-Term Risks
- Yen Dependence:
- The recent weakness in the yen, benefiting Japanese equities, might undergo a shift. The yen has appreciated about 5% since touching a low against the dollar in November, driven by expectations of the Bank of Japan (BOJ) ending negative rates.
- Analysts suggest that the yen’s influence has contributed to an “overstretch” in the Japanese market, potentially requiring an adjustment period for stocks.
- Narrow Rally:
- A risk emerges from the concentration of investors targeting the shares of large-cap companies, potentially leading to overpricing. About half of the positive performance in the Topix rally from April-September was attributed to 27 companies.
- Many investors, seeking alternatives to a slowing Chinese economy, directed funds to Japan, often focusing on major firms like Sony Group Corp. and Hitachi Ltd.
- Sluggish Consumption:
- Ongoing weakness in Japan’s consumer spending remains an obstacle to an early 2024 share rally. GDP contraction and a population decline contribute to sluggish spending trends.
- Wage increases failing to keep pace with inflation rates may be making Japanese consumers more hesitant to spend.
- Global Competition:
- Interest rate cuts in overseas markets may divert investors away from Japanese equities, especially as the BOJ is expected to raise borrowing costs.
- Anticipation of changes in the Federal Reserve’s tone could attract investors back to US equity markets, potentially leading to a correction in Japanese equities until mid-2024.
- Political Instability:
- Japanese Prime Minister Fumio Kishida’s declining approval ratings and a cabinet reshuffle to address a funding scandal have led to political instability.
- Unstable political conditions could exert downward pressure on Japanese equity markets, with the possibility of leadership changes within the ruling Liberal Democratic Party.
Investors are advised to closely monitor these short-term risks, acknowledging the potential impact on Japan’s stock market dynamics.
