Japan stocks surge to 34-year high, but rally could slow amid expected shift in monetary policy
- The gains in recent weeks were driven by yen weakness and global risk-on sentiment, with outlook for Japanese corporate earnings robust
- How long the stock rally can last will depend on whether the country can move from deflation into inflation as Japan’s central bank considers a rate hike, analysts say
The Japanese stock market has soared to a 34-year-high at the start of the year, maintaining its sizzling run that began last year. But the pace of the rally may slow down this year amid an expected shift in loose monetary policy, analysts say.
Japan’s benchmark Nikkei 225 index, which is at its highest level since 1990 after having surged in the past week, on Friday advanced 1.5 per cent to close at 35,577.11 points, defying lower Asia-Pacific markets that have most seen dips as of late.
“The gains in recent weeks were driven by a combination of yen weakness and global risk-on sentiment. A weaker yen tends to lift Japanese equity valuations, because many listed firms are manufacturers that benefit from a weaker exchange rate through improved export competitiveness and earnings,” said Stefan Angrick, a senior economist at Moody’s Analytics.
The Japanese central bank’s easy-money policy has led to a weaker yen, bringing higher profits for Japanese companies selling products like automobiles and auto parts overseas.
The bank has been following such a policy by holding down interest rates to encourage consumer spending. Its policy has sharply contrasted with the US Federal Reserve, which has hiked rates over the past year-and-a-half to fight inflation.
The value of the yen against the US dollar slid to 151 yen per dollar in November from 131 yen at the beginning of 2023, which “has shored up yen-denominated profits for Japanese corporations earning overseas”, said Nobuko Kobayashi, who is Ernst and Young’s Tokyo-based Asia-Pacific strategy execution leader.
Foreign investors have sought to take advantage of the difference in interest rates by scooping up stocks of Japanese companies. Strong earnings growth for Japanese equities, which have been available at attractive valuations, have amplified the trend.