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Japan defied expectations and the Nikkei 225 may continue rising in the change of cycle

Date: July 12, 2024 Time: 17:08:03

Japan’s stock market remains firm – despite the rise of geopolitical conflicts – with the Nikkei 225 looking at 40,000 points, a level not reached since the technology bubble of 1990. This is largely due to Strong business fundamentals, more efficient corporate management and increased foreign investment. These elements suggest that Japan has the strength to continue rising in the stock market.

Japanese companies are in the middle of a transformation phase, with expectations of more changes seeking greater efficiency and profitability. This process includes everything from business restructuring to the sale of non-essential assets.

According to Robert Plant, portfolio manager at Columbia Threadneedle, half of listed companies have taken action toward this end. “Japan’s demographic challenges could turn into positive factors, forcing companies to increase their productivity in the face of worker shortages, which could strengthen their profit margins,” he explains.

The average return on equity (ROE) for companies listed in the Topix 500 index (Japan’s benchmark stock index, along with the Nikkei 225) is 8%, lower than the 12% for the European Stoxx 600 and 17% for the S&P 500, according to First Eagle Overseas. Pressure from both regulators and foreign investment funds to achieve higher ROE increases profit potential.

Japan overcomes decades of deflation

There are signs that the Japanese economy is beginning to overcome the prolonged deflationary phase it experienced for decades. In 2023, consumer prices experienced a record increase not seen in the last 40 years, and the country recorded its first significant wage increase in a long time.

In March, an agreement was reached between unions and companies, affecting a workforce of seven million people, to raise wages by 5.3%, marking the largest increase since 1991. With inflation reintroduced into the equation , the outlook for consumer spending and corporate growth is more positive.

Japan attracts new investors

If periods of deflation in Japan have truly come to an end, this could further incentivize people to funnel their money into the Japanese stock market after decades in oblivion. During a deflationary phase, holding cash could be attractive, since its purchasing power increased with falling prices. However, this reasoning loses force in an inflationary context.

Additionally, the introduction of a tax exemption system that allows Japanese investors to invest in the market without tax worries is attracting a new wave of retail investors. This change is important, considering that Japanese households keep 53% of their wealth in cash and only 12.7% in stocks, unlike the United States, where the proportion is 14% in cash versus 39% in shares.

BlackRock and Warren Buffett bet on Japan

At the beginning of 2024, two of the largest investors in the world, BlackRock and Berkshire Hathaway (Warren Buffet) did not exactly view the world of investments with optimism. In both cases they anticipated less economic growth, higher than ideal inflation, high interest rates and more volatility. Japan presented itself as the only advanced economy that generated some enthusiasm.

“We maintain our bet on Japan indefinitely,” Buffett commented in his latest annual letter to investors. “We believe that the rally in Japanese equities has a long way to go, unlike other false starts,” Blackrock analysts stated at the end of February.

Japan, historically sensitive to global dynamics, now exhibits greater resilience, less affected by international economic variations. “The combination of overcoming deflation, wage increases and the revaluation of the real estate market contribute to a promising economic outlook,” they point out from Columbia Threadneedle.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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