The Zhitong Finance App learned that Schroder Investment Japan Equity Fund Manager Masaki Takezume said that since the beginning of 2024, the Japanese stock market has recorded a strong increase. Among them, the Nikkei 225 Index broke through the highest point during the bubble economy in December 1989. Factors such as the steady fundamentals of Japanese companies, improved corporate governance standards, and continued growth in demand from foreign investors eventually led to strong performance in the Japanese stock market. Considering the speed and nature of the recent rise in the Japanese stock market, investors may be cautious in the short term. Since large stocks with plenty of liquidity are likely to continue to show good performance, many large companies (especially constituent stocks in the Nikkei 225 Index) are already slightly overvalued. It is expected that the focus of the Japanese stock market will shift from large companies to small and medium-sized enterprises.

Masaki Takezume said that the recent strong performance of the Japanese stock market is driven by a number of factors, including increased corporate profits and improvements in fundamentals. Furthermore, the overall profit of Japanese companies is improving, and during the recent quarterly results announcement period, many companies raised their future profit forecasts. Overall, this means that corporate profits have also reached record highs, and this situation is expected to continue in the next few years. Among them, companies that mainly do business in Japan performed particularly well. Many companies recorded strong demand, and there are signs that Japanese companies will take back their pricing power (that is, the ability to adjust prices to cope with inflation) for the first time in decades. After years of deflation cycles, the importance of pricing power should not be underestimated.

In addition to this, rising wages and increased consumer purchasing power will drive strong growth in corporate profits. Increased profits can return to the economic cycle through further wage increases, thereby pushing the economy into a more active growth cycle. This is a virtuous cycle that Japan has been missing since the past generation.

Meanwhile, the Tokyo Stock Exchange continues to take various measures to promote corporate governance reforms. With the continuous improvement of reforms, the Japanese stock market, which had previously been snubbed by overseas investors for a long time, is gradually receiving the attention of global investors. In particular, as the stock market rises, Japanese stock repurchase activity continues to increase. It is expected that the buyback activity will continue and cause more companies to increase their return on share capital and face up to the problem that stock prices have been undervalued for a long time.

Takezumi Masaki said that investors need to maintain a cautious attitude due to developments in the money market and monetary policy, especially the sharp depreciation of the yen. This is largely related to the results of the 2024 “Spring Battle” (that is, large-scale spring wage negotiations). Preliminary reports show that the average increase in wage negotiations in 2024 was over 5% for the first time in the past 30 years. Although this further reflects a return to continued inflation in the Japanese economy and is a positive factor for long-term investment in Japanese stocks, it may reduce investor confidence in the short term. As the financial market has always anticipated, the Bank of Japan finally tightened monetary policy, ending the era of negative interest rates.

Despite these negative short-term factors, there are many reasons to believe that the Japanese stock market may stay ahead for a long time. Due to stable fundamentals of Japanese companies, favorable inflation, and many Japanese companies regaining pricing power, the Japanese stock market still has the most attractive investment opportunity in the world. Meanwhile, corporate governance reforms are expected to continue to be a structural driver, with investors, enterprises and regulators working together to raise corporate governance standards, improve returns, and boost growth prospects. Although the results of these initiatives are becoming increasingly remarkable, there is still significant room for progress.

Thanks to the new Japanese personal savings accounts, a large number of Japanese retail investors are also pouring into the stock market. The optimized Japanese personal savings account raised the upper limit of tax-free investment amounts for individual investors and was permanently exempt from taxes. This change comes at an opportune time, as the Japanese public is becoming aware of the impact of continued inflation on their financial assets. Thanks to strong returns from the Japanese stock market and continued inflation, it is expected that funds will continue to flow into the stock market through Japanese personal savings accounts.

Takezume Masaki said that in summary, these factors have prompted global investors to regain confidence in the Japanese stock market. As the positive momentum in Japan is more fully understood by investors, demand for the Japanese stock market will continue to increase. Although the overall valuation of the Japanese stock market seems reasonable, this masks a huge difference between large companies and small companies, where the valuations of large companies are relatively reasonable, while the valuations of small companies are more attractive overall.