Will the bull market continue?

28 February 2024

The equity indices in Japan hit new highs last week following Nvidia’s recent earnings beat. But will the momentum continue?

2023 was a great year to be a Japanese equity investor as Japanese equities outpaced other developed markets throughout the year. The Nikkei 225 and Japan’s TOPIX index hit levels not seen since 1989. The Nikkei rose 28% while the TOPIX index increased in value by 25%.

Japan saw a cyclical upturn, as it was relatively late to reopen after the COVID-19 pandemic. This meant investors became more confident in earnings growth. The cheap valuations in Japan didn’t hurt either.

Structural reforms also progressed. The TSE, Japan’s stock exchange, continued to call for companies to focus on achieving sustainable growth and on enhancing corporate value.

The good news is Wall Street remains bullish on Japanese equities, with some brokers like Goldman Sachs suggesting 2024 could be a transformational year for the country. Last week the broker even argued that Japan had its own “Magnificent Seven” stocks. The list included Screen Holdings (7735 JP), Advantest (6857 JP), Disco (6146 JP), Tokyo Electron (8035 JP), Toyota Motor (7203 JP), Subaru (7270 JP) and Mitsubishi Corp (8058 JP).

Is there more upside?

There is reason to be optimistic. The economy is expected to continue to grow, and the TSE will continue to make efforts to improve corporate government. Against this backdrop, foreign investment into Japanese equities should remain buoyant, and it is hoped that Japanese retail investors will increase their investment in the local market in response to pro-investment policies from the government, namely the NISA scheme.

Much is made about Warren Buffet’s investment into the Japanese trading companies in August 2020 as being a catalyst for the market. It was a significant event. Warren Buffet had traditionally shied away from investing in the Land of the Rising Sun for most of his career. It would be a mistake, however, to think the event fully explains the rally we have seen.

The origins of the bullishness can be traced back to the economic reforms of the former Prime Minister, Shinzo Abe, towards the end of 2012 and the beginning of 2013. His policy was called The Three Arrows, and its aim was to finally get Japan out of the deflationary hole it had found itself in after the famous Japanese Bubble burst in 1989.

The Three Arrows was based on three core tenants: huge government spending; huge quantitative easing and structural reform. The structural reform took a while to play out but over the last few years, the results have been significant with companies announcing buybacks and increasing their dividends. The policy was also successful in driving price increases. The current level of inflation is above the 2% target of the Bank of Japan with some commentators believing the Bank of Japan will finally normalize its zero-interest rate policy in response. Japan’s national CPI came in at 2.2% YoY for January.

Would like exposure to Japan?

  • iShares MSCI Japan ETF (IJP) gives you exposure to large and mid-sized companies in Japan and gives the investor targeted access to approximately 85% of the Japanese stock market.
  • Betashares Japan ETF (HJPN) provides diversified exposure to the largest globally competitive Japanese companies, hedged into Australian dollars.


Disclaimer: Nine Mile Financial Pty. Limited “Nine Mile” is a market maker licensed by ASIC to conduct investment activity on its own account. This communication and all information contained herein does not constitute investment advice, investment research, financial analysis, or constitute any activity other than dealing on our own account. Before making an investment decision you should consider the relevant Product Disclosure Statements and obtain financial advice.