Japan’s stock market has been soaring since the start of 2024, with the Nikkei and TOPIX hitting record highs. Both indexes surpassed previous records this week, with the TOPIX surpassing its 34-year high set in December 1989. Amid the celebrations, analysts are questioning whether the gains are sustainable.
The surge is largely due to strong corporate earnings. Monex Group’s Jesper Kohl credits decades of restructuring at Japanese companies for the strong profit growth, even as revenue growth has been slow. Kohl predicts 35% profit growth and 4% annual sales growth over the next two years, buoyed by recent wage hikes by Japan’s largest labor union, Rengo. The wage hikes will be the largest in 33 years and are expected to boost domestic consumption and profits.
Cole emphasized that the stability of Japan’s monetary, fiscal and regulatory policies is a key factor supporting financial markets. He predicted that the Nikkei Stock Average, which surpassed the 40,000 yen mark in March, could reach 55,000 yen by the end of 2025, up 37% from its current level.
Despite the optimistic outlook, some analysts remain cautious. A recent report from Nomura said the rally in the Nikkei and Tokyo Stock Exchange indexes may not be sustainable and blamed it on short covering in futures. But analysts acknowledged that the rally could become more sustainable if April-June corporate earnings beat expectations or if long-term investments flowed in.
Nomura emphasizes the large impact futures will have on Japanese stocks in the short term. As of June 28, foreign securities firms had a net short position of 17,000 contracts in futures. If these short positions were unwound, the TOPIX could rise by about 2-3%, reaching around 2,875 and the Nikkei around 40,600. Both indexes have already exceeded these levels, albeit slightly.
