Japan’s stock rally expected to slow: investors eye rivals as yen weakens and economy slows

The pace of the rally of Japan's stock market is now expected to slow down in the second half of 2024, giving investors a greater likelihood of shifting investments to rival markets.

A Bloomberg survey of asset managers and strategists called for a benchmark Topix index rise of around 2.9 per cent to 2,890 by year-end, while the Nikkei 225 Stock Average will climb about 4.8 per cent to 41,489. That would be a serious deceleration from the gain of about 18 per cent these indices made in the first half of this year. The broader Topix even climbed to a 34-year high, above its March highs, with the financial sector leading the gains.

Concerns about further yen weakness weighed on sentiment. Consumer and business spending wilted, and around a third of Bank of Japan watchers surveyed by Bloomberg expect a July rate increase. Released Friday morning, Tokyo's June inflation data came in higher - enough to keep a possible interest rate hike on the table, in theory, for the upcoming Bank of Japan meeting.

Add WION as a Preferred Source

“I don’t think we will see out-performance from Japanese stocks from here,” said Kyle Rodda, a senior market analyst at Capital.Com Inc. “Given the rally we saw at the start of the year, the underlying trends in the economy and policy lend themselves to more downside than upside risks.”

The yen slipped to 161 per dollar, bringing it close to levels not seen since 1986. Further predictions had it slumping as low as 170 per dollar. While a weaker yen benefits exporters, a weaker yen also contributes to inflation through higher import costs, hence suppressing real wages, which becomes a critical factor for the growth of Japanese equities.

Currency risks and a slowing economy are making some foreign investors look for opportunities outside Japan. The Topix trades at a price to earnings ratio of about 17 times, while 14 times for the Shanghai Stock Exchange Composite index. It is reported that for a fifth week, foreign investors sold Japanese cash equities in a row, which is the longest streak since March of the previous year.

“We think Japan may lag China, but still do quite well to broader Asia,” said Alexander Cousley, an investment strategist at Russell Investments Group LLC. “Valuations are there, with Chinese equities notably cheaper than Japanese and global equities.”

That said, many still remain positive on Japan with companies such as BlackRock Inc. staying overweight on Japan equities. In June, a survey by Bank of America showed Japan is still the most favoured market in the region. Using forward earnings, the MSCI Japan index is expected to rise 16 per cent in the next 12 months, while the MSCI World index is expected to rise by 8.5 per cent, based on Bloomberg data.

“Earnings for Japanese companies, which have already outperformed the underlying economy, are expected to improve even further and lead the developed world at about 11%–13% this year,” Alexander Wolf, head of Asia Investment Strategy at JP Morgan Chase Bank NA wrote in a note this month.