[Global Focus] The Two Faces of the 'Record-Breaking Yen Weakness'... Shadows of Recession Loom Over Japan's Booming Stock Market

Review of the Japanese Stock Market <Part 1>
Nikkei 225 Up 26% Since Early This Year
Positive Outlook Expected Until March Next Year
Criticism That Yen Depreciation Export Boom Is a 'Temporary Effect'
Small Businesses and Service Industries Suffer Impact

This year, Japan's Nikkei 225 index surpassed the psychological resistance level of 33,000 for the first time in 33 years since the collapse of the bubble economy, sparking increased interest in the Japanese stock market. Domestic investors are joining the buying spree of Japanese stocks one after another, and domestic asset management companies are busy preparing investment products to accommodate them. The rise in the Japanese stock market is the result of various positive factors, including increased earnings of Japanese companies due to the weak yen, the Japanese government's stock market stimulus measures, and investments in Japan's five major trading companies by Warren Buffett, the "Sage of Omaha" and chairman of Berkshire Hathaway.

Investors, commonly referred to as "Ilhak Gaemi" (Japan stock ants), are focused on whether the Japanese stock market will continue its upward trend. In the Japanese capital market, the weak yen is considered a "double-edged sword" for the stock market's rise. While the continued depreciation of the yen could serve as a catalyst for the Nikkei 225 to reclaim the 38,000 level in the short term, it is also analyzed as a potential trigger for deepening Japan's economic recession in the long term.

Japan's Leading Stock Index Hits New High... Stock Market Boosted by Weak Yen

According to Bloomberg, on the 4th at the Tokyo Stock Exchange, the Nikkei 225 index closed at 32,710.62 yen, up 0.7% from the previous trading day. The Nikkei 225 showed a gradual upward trend, ranging between 25,000 and 27,000 in January this year, before sharply soaring from the end of April. In June, it surpassed the 33,000 yen mark for the first time in 33 years since the bubble economy collapse in 1990. The 33,000 yen level is considered a psychological resistance zone for the Nikkei 225 index. The Nikkei 225's year-to-date increase is 26%. During the same period, South Korea's KOSPI rose by only 15.22%.

The TOPIX index, which focuses on large-cap stocks, closed at 2,373.73, up 1.02% from the previous trading day. The TOPIX index surpassed its highest point in 33 years on May 5, reaching 2,127.18 during intraday trading, breaking the previous high of 2,215.43 recorded on August 2, 1990. Since then, the TOPIX index has shown a rising curve with minor fluctuations and declines.

The deepening of the weak yen is acting as a catalyst for the rise in the Japanese stock market. SMBC Nikko Securities estimated that the net profit of major listed Japanese companies for the 2022 fiscal year (April 2022 to March 2023) will slightly exceed 34 trillion yen, the record high set in 2021. It is analyzed that earnings surprises, mainly from general trading companies and large corporations with high export ratios, drove the increase in net profits.

Since the Japanese stock market and industries are centered on export-oriented companies, the improvement in these companies' earnings serves as a driving force for the stock market's rise. According to a survey conducted by market research firm Teikoku Databank on 11,503 companies last year, 18.1% of all respondents said the weak yen had a positive or no impact on their sales, with a higher proportion of large companies giving such responses.

Headquarters building of Itochu Corporation, one of Japan's five major trading companies [Image source=Yonhap News]

Senior researcher Kim Seong-hwan of Shinhan Investment Corp. explained, based on the fact that the benefits of the weak yen are concentrated on large export companies, "When the yen depreciates by 10%, Japanese companies' earnings rise by nearly 10% compared to American companies, leading the stock market's rise."

Experts Predict Nikkei 225 to Reach 38,000 Next Year

The Japanese securities industry expects the favorable stock market conditions to continue for the time being. In addition to strong corporate earnings driven by the weak yen, the Japanese government and companies are actively raising workers' wages, which is expected to act as a positive factor for the stock market.

Nomura Securities forecasted that the Nikkei 225 index could reach up to 38,000 yen by March next year. This figure is close to the all-time high of 38,957.44 yen recorded in 1989 at the peak of the bubble economy. The TOPIX index is predicted to rise to as high as 2,600. Nomura Securities explained that it revised its previous forecast of the Nikkei 225 index from a maximum of 32,000 yen upward, citing "the fact that corporate margins are progressing better than expected due to the weak yen."

Masayuki Kichikawa, senior macro strategist at Mitsui Sumitomo DS Asset Management, also gave a positive outlook, saying that the Nikkei index will rise to 38,000 in the first quarter of next year. Strategist Kichikawa analyzed, "Japan's macroeconomic environment is showing signs of change," and "Japanese companies can improve profits by passing on raw material costs to product prices through wage increases."

Voluntary improvements in corporate governance by companies are also expected to have a positive impact on the stock market. In March, the Tokyo Stock Exchange requested listed companies with a price-to-book ratio (PBR) below 1 to enhance corporate value, prompting major listed companies to consecutively repurchase their own shares. In response to the securities authorities' request, Mitsubishi Corporation decided to buy back up to 6% of its own shares for $2.2 billion, and Honda plans to repurchase 200 billion yen worth of its own shares, equivalent to 4% of total shares, in the 2023 fiscal year (April 2023 to March 2024) as part of shareholder returns.

Dividends from listed companies are also expected to increase significantly. Nihon Keizai Shimbun estimated that the expected dividends of Japanese listed companies for this fiscal year will reach 15.2 trillion yen (approximately 142.1382 trillion KRW), an increase of 100 billion yen compared to the previous year, which was a record high. With companies actively engaging in shareholder returns like this, the upward momentum of the Japanese stock market is expected to gain strength.

Small and Medium Enterprises Struggle Due to Weak Yen... Decline in Japanese Citizens' Real Purchasing Power

Some point out that while the wave of the weak yen may have a positive short-term impact on the stock market, it could be a factor in economic slowdown in the long term. Except for a few large export corporations, most small and medium-sized enterprises and service companies could suffer severe damage to their management due to the weak yen.

In a survey by Teikoku Databank, 62% of companies that said the weak yen negatively affected their performance expressed concerns that the depreciation of the yen would increase labor costs for overseas personnel and raw material import costs. These companies were mainly service and wholesale/retail businesses.

In the short term, since companies with a small market capitalization proportion are affected by the weak yen's negative impact, it may be difficult for this to influence the overall stock market direction. However, if these companies pass on losses caused by the weak yen to service and retail prices, the ripple effect will spread not only to the stock market but also throughout the economy. With Japan's real wages falling for 14 consecutive months as they fail to keep pace with rising prices, rapid price increases could lead to reduced consumption and economic slowdown.

Also, since household consumption accounts for as much as 50% of Japan's gross domestic product (GDP), the decline in corporate earnings due to economic slowdown could cause significant repercussions in the stock market as well.

Teikoku Databank pointed out, "The number of companies going bankrupt due to rising (raw material) purchase prices caused by the weak yen is increasing," and added, "Export companies are increasingly expanding overseas production, so the export boom caused by the weak yen will be a short-lived effect and will rather worsen the real purchasing power of Japanese citizens."

This content was produced with the assistance of AI translation services.