Japanese stock indexes Nikkei and TOPIX reach fresh record highs
The Japanese stock market saw a bullish run on Monday, with the Nikkei 225 gaining 336.00 points to close at a new all-time high of 43,714.31, and the TOPIX index rising 13.28 points to close at 3,120.96. However, the optimism surrounding the market is not unanimous.
Officials at a domestic and a midsize securities firm have expressed caution about the sustainability of the rally, suggesting that it may not last long. The officials' statements indicate uncertainty about the sustainability of the current bullish trend in the Japanese stock market, with some pointing to short-term foreign investments as the primary driver of the recent rally.
The current bullish run in Japanese stock markets is primarily driven by several key factors. Corporate governance reforms and capital efficiency improvements have significantly boosted profitability, with Japanese firms increasing return on equity (ROE) to about 9% from under 3% in 2010 and executing ¥10 trillion in share buybacks, supporting shareholder returns.
The TOPIX index trades at a significant valuation discount (~15x forward P/E) compared to the S&P 500 (~22x forward P/E), making Japanese stocks attractive amid global volatility. Foreign investment inflows have surged, with the largest weekly foreign investment ($7.87 billion) in over 4 months occurring recently, further fueling the stock rally.
Positive technical signals and earnings upgrades also reinforce the bullish trend. Despite some short-term pullbacks, technical indicators like the Nikkei 225's support levels, improving market breadth with 82% of components trading above 200-day moving averages, and consistent earnings upgrades support the bullish trend.
Experts view these factors as creating a structural bull case for Japanese equities, suggesting the current rally may be sustainable over a multi-year horizon due to enhanced profitability, governance reforms, and still-underappreciated valuations.
However, some risks temper this optimism. Rising Japanese government bond yields due to fiscal and political uncertainties pose a potential challenge to market stability and debt servicing costs. The US Federal Reserve's path remains uncertain; if employment or inflation data surprises on the upside, expected rate cuts may be delayed, dampening global risk appetite and possibly Japan’s market momentum.
Despite these concerns, the consensus among experts and analysts is cautiously optimistic about the sustainability of Japan's bullish run, supported by solid fundamentals and foreign inflows but contingent on continued supportive macroeconomic conditions and political stability.
It's worth noting that the officials at the midsize and domestic securities companies have expressed more reserved views about the outlook for the next fiscal year, stating that it's too early to factor in outlooks for the next fiscal year. No further details about the corporate earnings expectations were provided by the officials.
In conclusion, while the Japanese stock market is currently experiencing a bullish run, the sustainability of this trend is a topic of ongoing debate among experts. Despite the cautious optimism, the structural bull case for Japanese equities remains strong, driven by enhanced profitability, governance reforms, and still-underappreciated valuations. However, potential challenges such as rising Japanese government bond yields and uncertainties in the US Federal Reserve's path could impact the market's trajectory.
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