- The Nikkei and Tokyo Stock Price Indexes have surpassed previous records this week, hitting new all-time highs on Thursday, with the Tokyo Stock Price Index breaking its 34-year record set in December 1989.
- Jesper Kohl, specialist director at Tokyo-based financial services firm Monex Group, told CNBC that the current stock price rally is driven by a single driver: earnings.
- But Nomura analysts say those gains don’t look particularly sustainable, although they could become sustainable if corporate earnings surprise upwards.
Japan’s stock market is showing strong performance in 2024.
In February, Japan’s benchmark Nikkei stock average surpassed its 1989 high..
The Nikkei and Tokyo Stock Price Indexes have surpassed previous records this week, hitting new all-time highs on Thursday, with the Tokyo Stock Price Index breaking its 34-year record set in December 1989.
How did the market reach this level, especially with the Nikkei Stock Average hitting its second record high this year?
Jesper Kohl, director of expertise at Tokyo-based financial services firm Monex Group, told CNBC that profits are the only driving force behind the current market rally.
“Japanese companies are currently benefiting from decades of restructuring,” Mr. Cole said, adding that “with their break-even points being among the lowest in the world, even small increases in sales can lead to explosive profit growth.”
He predicted that revenue will grow 35% over the next two years (April 2024 to March 2026) and sales will grow 4% annually.
He based his forecast on expectations that Japanese companies would achieve sales growth both at home and abroad, and explained that his prediction of a 4 percent sales increase was due to wage increases announced on Thursday by Japan’s largest labor union.
Japan’s largest labor union, Rengo, said Japanese companies implemented their biggest wage hikes in 33 years this year.
Union members’ monthly wages will rise by an average of 5.1 percent in the fiscal year ending March 2025. The federation also said large companies with more than 300 members received a 5.19 percent wage increase, while small and medium-sized companies received a 4.45 percent increase.
“You don’t have a spring offensive. [wage hike] “For example, there are cases where sales increase by 5% and nominal sales increase by less than 4%,” he points out.
More importantly, Japan is a “bastion of stability,” said Cole, noting that Japan’s monetary, fiscal and regulatory policies are stable and pro-growth, providing important supports for financial markets.
When the Nikkei topped 40,000 in March, Cole told CNBC at the time that it was “perfectly reasonable” for the index to surpass 55,000 by the end of 2025.
“I’m sticking to my prediction: The Nikkei will rise to 55,000 by the end of next year,” Cole told CNBC this week.
If his prediction proves correct, it would represent a 37% increase from the 40,000 level.
Cole previously predicted that the Nikkei would surpass 40,000 yen within 12 months of July 2023. His prediction was proven correct as the index reached that level within eight months.
How sustainable is this increase?
But the biggest question is how long this rise will last.
According to a report released by Nomura on Thursday, the rise in the Nikkei and Tokyo Stock Price Indexes does not appear to be sustainable, with analysts pointing out that it is due to short selling in the futures market.
However, there are some points to note.
“This sharp rise could be sustained if there is a greater chance that corporate earnings in the April-June quarter will be better than expected and if there is an increased likelihood of long-term capital inflows into the Japanese stock market,” they said.
Nomura said futures “will tell us a lot” about the performance of Japanese stocks in the short term, noting that foreign securities firms’ net short positions in futures reached 17,000 contracts as of June 28.
Nomura predicts that once these short positions are unwound, the TOPIX will rise by about 2-3% from its June 28 level. According to the firm’s calculations, the TOPIX would reach about 2,875 and the Nikkei average would reach about 40,600.
Both indexes subsequently surpassed Nomura’s forecast, though by a smaller margin.
Nomura analysts said, “We will be watching closely to see whether capital inflows into domestic equity mutual funds and ETFs listed in Japan, which have been experiencing capital outflows, and U.S.-listed ETFs, increase.”