'All-Time High' Japanese Stock Market: "Surpassing 40,000" vs "Capital Outflow from China"

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The Nikkei 225 index, the representative stock index of the Japanese stock market, has reached an all-time high. It surpassed the peak set during the bubble economy at the end of 1989 for the first time in 34 years. The market envisions a rosy future where the Nikkei index will break through the 40,000 mark. However, there are also cautious forecasts that if the Chinese capital, which has been a pillar of the stock market, withdraws again, it could act as a negative factor. The yen-dollar exchange rate, which has surpassed the psychological resistance level of 150 yen, is also a source of concern.

On the 22nd, the Nikkei index closed at 39,098.68, up 836.52 points (2.19%) from the previous session. During the day, the index briefly reached 39,156.97, significantly surpassing the previous all-time high of 38,957 set on December 29, 1989, during the bubble economy.

[Image source=AFP Yonhap News]

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The cause of this boom in the Japanese stock market is attributed to the solid performance of Japanese companies. The Nihon Keizai Shimbun previously predicted that the first-quarter net profit of 1,020 listed Japanese companies would reach a record high of about 43.5 trillion yen (approximately 385 trillion won). It is also estimated that the annual net profit of major Japanese listed companies with a fiscal year ending in March will set a record high for the third consecutive year. The net profit margin relative to sales is expected to reach 5.8%, which, except for 6.1% in the first quarter of 2022, will be the highest since the 2008 financial crisis.

The record depreciation of the yen has also driven foreign capital inflows. According to data from the Tokyo Stock Exchange, foreign investors' investment in the Tokyo Stock Exchange Prime (first section) market in January this year approached 2 trillion yen (about 17 trillion won). The strong performance of Nvidia, a leading U.S. semiconductor company in artificial intelligence (AI), also positively influenced the rise of related stocks such as Tokyo Electron and SoftBank Group in the Tokyo stock market. These two companies closed up 5.97% and 5.14%, respectively, on the 22nd compared to the previous session.

Automobile stocks also joined the rally. Toyota Motor Corporation recorded an all-time high stock price on the 22nd, surpassing a market capitalization of 57 trillion yen (about 500 trillion won), supported by improved export performance due to yen depreciation and product price increases. The consolidated net profit forecast for the 2023 fiscal year ending March 31, 2024 (based on international accounting standards) is estimated at 4.5 trillion yen (about 38 trillion won), an 84% increase from the previous year.

Goldman Sachs recently named seven stocks?Screen Holdings, Advantest, Disco, Tokyo Electron, Toyota Motor, Subaru, and Mitsubishi Corporation?as the ‘Samurai 7’ leading the Japanese Nikkei index. This is analyzed to be comparable to the ‘Magnificent 7’ leading the U.S. New York stock market.

Active shareholder-friendly management by companies has also contributed to the rise in stock prices. The Tokyo Stock Exchange requested listed companies undervalued with a price-to-book ratio (PBR) below 1 as of March last year to devise countermeasures. Companies responded by improving return on equity (ROE) and implementing policies such as share buybacks and dividend increases.

Additionally, the newspaper pointed out that the increase in domestic demand due to rising foreign tourist visits to Japan, abundant cash assets of listed companies amounting to 100 trillion yen, and active wage increase movements have acted as tailwinds for stock price rises. Kazuo Ueda, Governor of the Bank of Japan (BOJ), said in parliament on the 22nd, "The virtuous economic cycle of wages and prices is laying the groundwork for ending negative interest rates."

The Japanese stock market has continuously risen this year, raising expectations for new all-time highs. The Nikkei index has risen about 17% this year. In contrast, during the same period, the U.S. Standard & Poor's (S&P) 500 index rose about 6% (as of the 22nd), while South Korea's KOSPI has been flat.

Expectations for further stock price increases continue. Japanese experts predict the Nikkei index will surpass 40,000 this year. Daiwa Securities Japan raised its 2024 forecast for the Nikkei index by 3,400 yen from the previous estimate to 43,000. Bank of America (BoA) also raised its year-end Nikkei index forecast from 38,500 to 41,000. The forecast for the TOPIX index was also raised from 2,715 to 2,850.

However, there are also views expressing concern about these rosy forecasts. If the BOJ, the largest stakeholder in the Japanese stock market, starts selling exchange-traded funds (ETFs) it purchased during the stock price decline, the market could become volatile. The Nihon Keizai Shimbun pointed out, "Index-linked investments such as ETFs, which buy the entire stock market including low-yield companies, can weaken the market's selection function." According to Shingo Ide, chief equity strategist at NLI Research Institute, the BOJ's ETF holdings amounted to about 70 trillion yen (about 620 trillion won) as of the close on the 15th.

There is also a possibility that Chinese capital inflows into the Japanese stock market, driven by the worsening Chinese real estate market, could reverse. The newspaper expressed concern, "Since last year, the Japanese stock market has been driven largely by Chinese capital inflows. If overseas capital withdraws while Japanese investors, attracted by the growth potential of the U.S., maintain net short positions in the Tokyo stock market, it could act as a negative factor for the market."

The yen-dollar exchange rate exceeding 150 yen, considered a psychological resistance level in Japan, is also a source of instability. If Japanese foreign exchange authorities intervene in the market to support the yen's value, the attractiveness of the Tokyo stock market to foreign investors could decline. Moreover, a decline in the yen-dollar exchange rate due to yen appreciation could negatively impact Japanese export companies currently supporting the Japanese stock market.

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