Japan’s stock markets have soared so far in 2024, with the Nikkei 225 and the Topix hitting new all-time highs. This week, both indices surpassed previous records, with the Topix breaching a 34-year high set in December 1989. With all of the celebrations going on, analysts are asking questions about whether this rally is sustainable or not.
The surge is largely driven by strong corporate earnings. Jesper Koll from Monex Group credits decades of operational restructuring in corporate Japan, leading to significant profit growth even with modest revenue increases. Koll forecasts 35% earnings growth over the next two financial years and a 4% annual topline growth, bolstered by recent wage hikes from Japan’s largest union, Rengo. These wage increases, the largest in 33 years, are expected to boost domestic consumption and revenue.
Koll emphasizes Japan’s stability in monetary, fiscal, and regulatory policies as a key factor supporting the financial markets. He predicts that the Nikkei 225, which crossed the 40,000 mark in March, could reach 55,000 by the end of 2025, representing a 37% increase from its current level.
Despite the optimistic outlook, some analysts remain cautious. A recent note by Nomura suggests that the gains on the Nikkei and Topix may not be sustainable, attributing them to short covering in futures. However, the analysts acknowledge that if corporate earnings for April-June exceed expectations or if there is an influx of long-term investment, the gains could become more sustained.
In the near term, Nomura highlights the significant influence of futures on Japanese equities. As of June 28, foreign securities companies’ net short interest in futures was 17,000 contracts. Unwinding these short positions could boost the Topix by approximately 2%-3%, potentially bringing the index to around 2,875 and the Nikkei 225 to around 40,600. Both indices have already surpassed these levels, albeit slightly.
