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Can Japanese Stocks Continue to Soar? Resolution of US Debt Ceiling Impasse Helps

Dai-ichi Life's chief economist believes strong Japanese stocks are due to corporate earnings and shareholder return policies that met investor expectations.

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A monitor shows the Nikkei Stock Average at 32,534.47 yen at the end of trading on the afternoon of June 6. Higashi-Shimbashi, Tokyo. (©Kyodo)

The Nikkei Stock Average has reached a 33-year high since the bursting of the Bubble Economy. And with the resolution of the United States federal debt ceiling issue, it is likely to maintain its upward trend through June 9th and beyond. Nonetheless, the pace of the rise of Japanese stocks has been rapid since reaching the 30,000-yen level in May. 

Some market watchers believe it may pause to catch its breath. They note the uncertain outlooks for the US and Chinese economies, which could become risk factors for Japanese equities.

Foreign Investors Role

Even though the market had already factored in the avoidance of a default on US Treasuries, formal passage of the debt ceiling deal by the US Congress on June 3 eliminated one risk to the surging Japanese stock market. 

Participation by foreign investors is one of the factors behind the strong performance of the benchmark Nikkei Stock Average. It recovered to the 30,000-yen level on May 17 for the first time in about one year and eight months. A visit to Japan in April by renowned American investor Warren Buffet, "the Sage of Omaha," drew considerable attention. 

A sense of affordability due to the weak yen has also provided a tailwind. And overseas buyers have continued to be large net buyers of Japanese equities.

Koichi Fujishiro, chief economist with the Dai-ichi Life Institute believes, "Share price increases are largely attributable to strong corporate earnings results and shareholder return policies that met investor expectations."

With business results for Japanese companies recovering as Japan emerged from the COVID-19 crisis, companies have proved willing to implement shareholder return measures. For example, share buybacks and dividend increases. These have further encouraged investors to buy.

Market Cautions

On the other hand, some analysts expect increased selling in the future to lock in gains. Toshio Morita, chairman and CEO of the Japan Security Dealers Association, views the market with caution. He says, "It will be too high in the immediate future. And I wouldn’t be at all surprised to see a correction."

Yutaka Miura, senior technical analyst with Mizuho Securities believes there are overseas risks. 

"If the US economy deteriorates and falls into recession, there is a danger that lower US interest rates could cause the yen to appreciate," he points out. The fact is that strong results of exporters, which drive stock prices, are supported by the weak yen.

Even though China has abandoned its "zero COVID" policy, the Chinese market has been slow to recover. Tomohisa Ishikawa, advanced senior economist with Japan Research Institute (Nihon Sogo Kenkyujo) warns, "We must remain cautious (about China) because the real estate bubble problems have yet to be resolved."

He also cites the situation in Ukraine and the possibility of a Taiwan contingency as other causes for concern. 

Bank of Japan
Bank of Japan Governor Kazuo Ueda speaks at the House of Representatives Committee on Financial Affairs. On the morning of April 18.(© Sankei by Yasuhiro Yajima)

BOJ Kazuo Ueda's Signals 

The buying of Japanese stocks is partly attributable to investors' sense of security from new Bank of Japan Governor Kazuo Ueda. He has signaled his willingness to continue the large-scale monetary easing program of this predecessor. However, there is a danger that a change in BOJ policy could lead to a sharp deterioration in investor sentiment. 

To continue rising, Japanese stocks must also become more attractive. Such factors as reaching the Tokyo Stock Exchange target of a P/B (price/book value) ratio of less than one for listed companies and continued shareholder buyback policies are likely to be important. Especially if equity prices are to continue their upward march.  

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(Read the article in Japanese.)

Author:  Gen Koganezaki and Tomotaka Nakamura, Sankei Economic News