Wealth managers share their insights into why they are positive about Japanese equities in 2024, and also highlight the risks.

Kelly Chia, deputy head of research Asia at Swiss private bank Julius Baer, thinks that Japan remains a market that will be able to compete with the Standard & Poor’s 500 Index (S&P500) in 2024. And Chia is part of a bullish trend about the Asian country's equity market. 

“Corporate reforms, currency and flows have continued to be encouraging,” Chia said in a note this week. He thinks that large market cap, pay hikes, earnings revisions and geopolitics are factors that add to the positive outlook for Japanese stocks.

“Since our upgrade of the Japan stock market in October 2023, the performance of the market has been excellent,” he continued.

Other wealth managers, such as BNY Wealth Management, also favour Japanese equities in 2024. Michaël Lok, group CIO and co-CEO asset management at Swiss private bank Union Bancaire Privée, Willem Sels, global chief investment officer at HSBC Global Private Banking and Wealth, are also positive about Japanese equities in 2024. See more here, here and here.

As pressure builds in this new paradigm of corporate governance, Julius Baer's Chia thinks quality well-held companies may steadily rise, but he expects some of the poorly run companies to become “less bad.” This could result in sharp upside in stock prices. However, Chia maintains his stance that small/mid cap companies do not possess the bandwidth to sustain the reform.

Citing factors that could derail the Japan bull market, Chia said that in the short term if the Chinese stock market recovers, hedge fund type of fast capital could take profit in Japan and rotate to China. Japan’s correlation with the US markets is something to be mindful of, he added. If the Bank of Japan (BOJ) does not handle its exit from the negative interest rate policy (NIRP) well, a strengthening yen generally poses a headwind to stocks, he continued.

In the mid-term, influential foreign investors could change their minds, he said. If Warren Buffet or his successor, for instance, decides to divest his sogo-sosha holdings, this could spark a sell off.

In the longer term, Chia thinks that demographics is a real problem. “Japan’s population peaked 30 years ago in 1995. It appears the only way Japan can solve it is with immigration or possibly artificial intelligence,” he said.

Nevertheless, Chia remains bullish on the Japanese market with expectations of the occasional pull backs. “With negative real rates and a resilient global economy, the Japanese stock market should continue to be the beneficiary of capital inflows,” he said. “The 10-year Japan government bond yield will find its way to 1 per cent over time. Thus, a combination of the two ongoing themes (short JPY bonds, long JPY stocks) should continue to work over-time.” 

Nikko AM
Naomi Fink, global strategist at Nikko Asset Management, also highlighted this week how Japan’s GDP growth is expected to pick up from anaemic levels in the fourth quarter of 2023, rising above 1 per cent year-on-year by the first quarter of 2025. This would be comfortably above most estimates of potential GDP growth.

Due to historic wage rises agreed during the spring rounds of negotiations, real wage growth is expected to buoy consumption and keep Japan’s “virtuous circle” of reflation alive, Fink said. In addition, corporates are seen continuing to support private non-residential investment with healthy capex through 2024. The BOJ is expected to follow its exit from unconventional monetary policy with one or two rate hikes in 2024, she added.

With Japan’s “virtuous circle” of reflation likely to remain intact, her central scenario includes stronger private investment and domestic consumption assisted by real wage growth.

In light of the favourable global growth environment, Fink sees a positive outlook for global equities. Until now, many of the gains have been concentrated in the tech sector, particularly those involved in artificial intelligence, AI-related semiconductors and software development. However, Fink sees some potential for an extended late cycle rally that could broaden the gains beyond tech-centric sectors. This includes those that might benefit from stronger-than-expected domestic demand in the US and Asia, including Japan in particular.

Fink expects Japan’s Tokyo Price Index (TOPIX) to rise further, gaining around 11 per cent over the coming financial year, benefiting from low volatility, a weak yen and rebounding domestic growth.