Friday Mar 29 2024 11:19
5 min
Japan's Nikkei index closed higher on Friday, led by gains in chip-related heavyweights, and marked a record fiscal-year increase in terms of points amid heavy foreign buying.
The Nikkei 225 index has consistently reached new highs throughout this month, after breaking past levels last seen on Feb. 22, 1989 — during Japan's bubble economy.
Foreign buying, driven by a weaker Japanese yen and expectations of continued loose monetary policy from the Bank of Japan, have fueled the upward trend.
For the fiscal year ending Friday, the index surged by 12,328 points, marking its largest absolute gain. It rose by 44% — the most since the financial year ending March 2021.
On Friday, the Nikkei closed up 0.5% at 40,369.44, recovering from losses seen in the previous session. Fumio Matsumoto, chief strategist at Okasan Securities, commented on the dynamics to Reuters:
"Investors remain cautious over a possible intervention in the currency market but overall they take the weak yen as a positive factor for domestic stocks”.
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The Japanese yen dropped to a 34-year low against the dollar this week, prompting local authorities to convene an emergency meeting, indicating that Tokyo may potentially intervene to support the currency.
Chip-related stocks like Tokyo Electron and Advantest saw gains of 0.79% and 1.85%, respectively.
The property sector surged by 1.96%, marking a 16% increase for the month, the highest among sectors. This sector received a boost from a government survey released this week, revealing that land prices in Japan recorded their fastest growth in 33 years in 2023.
Okasan Securities’ Matsumoto added that optimism about the Bank of Japan's gradual approach to interest rate hikes is providing rapid support for stock prices. The BoJ ended eight years of negative interest rates on Tuesday, March 19, marking a historic shift away from decades of massive monetary stimulus.
The broader Topix index also rose on Friday, climbing by 0.61% to 2,768.62.
Some Wall Street banks recently changed their Nikkei index forecasts for 2024, with Bank of America in February upgrading their projection to 41,000 from 38,500 based on Japanese firms’ solid earnings.
Not everyone, however, shares the optimism – in early March, Kazuo Momma, executive economist at the Mizuho Research Institute, told CNBC that while Japanese firms saw a significant improvement in profit margins in 2023, partly due to successful price hikes, this could be a one-off development.
He anticipates that the Nikkei's upward trajectory won't continue in a straight line, with potential corrections possible in the coming weeks or months:
“I would not be surprised if Nikkei goes down 36,000-37,000 levels at one point around mid-year".
He added that even if that happens, the Nikkei 225 would likely regain to the 40,000 level by year-end.
Sayuri Shirai, professor at Keio University and former Bank of Japan board member, also told CNBC that foreign profits are heavily impacted by the dollar-yen exchange rate, casting doubt on the sustainability of the Nikkei's rapid surge.
“It is still too early to say this trend is sustainable. Domestic economy remains weak. [...] In Japan, there is no strong enthusiasm. [...] The economy is much weaker due to ageing and low productivity growth,” said Shirai.
Japan's aging population is also posing increasing challenges to its public finances, noted Shirai, who also warned investors to remain cautious amid potential downturns, especially if the yen strengthens against the dollar, which could diminish earnings.
Despite the Nikkei's rally, experts have pointed out discrepancies with the country's economic data, suggesting the index doesn't accurately reflect the overall economic situation.
“The Nikkei is a flawed stock market gauge given its price-weighted methodology”, Phillip Colmar, Managing Partner at research firm MRB Partners, told CNBC.
In price-weighted stock indexes, a company’s stock is weighted by its current price, as opposed to capitalization-weighted indexes such as the S&P 500 where stocks are weighted based on their total valuations.
“Equity markets are sentiment gauges and much more volatile than the underlying economy”, Colmar said, stressing that the Nikkei's recent surge doesn't necessarily signify a dramatic improvement in Japan's economic outlook but rather a reduction in the risk of chronic deflation.
When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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