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Japan: A rally without a clear cause

22 February 2024

Emerging growth narratives such as semiconductors may come into focus in 2024.

By Naoki Kamiyama,

Nikko Asset Management

While impressive, the flying start for Japanese stocks in 2024 – the Nikkei Stock Average surged to a 34-year peak early in January and is up 8.5% year-to-date at the time of writing – may have left more questions than answers.

The reason behind the market’s rally is not entirely clear, especially given the seeming lack of new market drivers. Although the weak yen has been attributed as a factor, a look at the charts shows that a correlation between stock prices and dollar/yen levels has not been strong recently.

Revamped Nippon Individual Savings Accounts (NISA), whose enhanced tax benefits are expected to attract individual investors to stocks, has also been suggested as an incentive behind the early January market rally.

This is expected to support the market over the longer run. In the short term, however, Tokyo Stock Exchange data show that individuals were net sellers of stocks during the first three weeks of January, possibly having sold into the rally to take profits.

The driver of the January rally could therefore have been something more mundane, such as fundamental demand that is common at the start of the year but not necessarily linked to specific incentives.

A rally without a clear cause can leave stocks exposed to sudden corrections, and the market could be susceptible to turbulence caused by developments such as the Bank of Japan (BOJ) steering monetary policy towards higher interest rates.

The question is whether there are factors which can sustain the market through such turbulence and potentially take it higher. In this regard, the recent robust performance by Japan’s semiconductor-related shares could be the next hot topic for the market in 2024.

These firms are enjoying support with the semiconductor cycle seemingly having bottomed out and many have seen a strong recovery in revenues. In the longer run, Japan’s semiconductor-related firms stand to benefit from factors such as active government support, partnerships and alliances among the sector’s domestic companies, leading foreign manufacturers setting up production hubs in Japan, and realignment of supply chains.

Japan was once a semiconductor powerhouse and developments towards the country regaining some of its former heft could become the stock market’s growth story for 2024.

Such a growth narrative may provide some stability to the market when the time comes for the BoJ to end its negative interest rate policy and pave the way for monetary policy normalisation.

It will be worth remembering that when the central bank takes a step towards normalising monetary policy, its decision will be based on confidence that the rise in wages has become sustainable.

A sustained rise in wages, coupled with persisting labour shortages, would result in increased consumption and capex, in turn allowing the stock market to ride out any appreciation by the yen resulting from the BOJ’s change in policy.

For the time being, we therefore maintain our view of the Nikkei ending the year around 36,500.

Naoki Kamiyama is chief strategist at Nikko Asset Management. The views expressed above should not be taken as investment advice.

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