Revitalized Japanese Stock Market Fuels Investor Optimism

Promising signs of growth and reform in Japan are instilling investors with renewed optimism, revitalizing the country’s stock market. Dina Ting, Head of Global Index Portfolio Management for Franklin Templeton Exchange-Traded Funds, delves into these positive developments and sheds light on Japan’s expanding economic prospects.

High-profile endorsements of Japanese blue chips ignited optimism in Tokyo’s markets last year as the yen depreciated. An expected macro regime shift from deflation to inflation, robust corporate earnings and Japan’s corporate governance reform efforts, such as improved shareholder advocacy, are fueling further optimism in 2024.

The bullishness comes despite Japan’s fall in world rankings—when Germany eclipsed it recently as the world’s third-largest economy—following a surprise technical recession in the third quarter of 2023. Prospects for wage growth also continue to underpin the country’s still-sluggish private consumption and capital spending.

Fortunately, however, economists anticipate Japan’s 2024 wage hikes to be higher than last year’s already encouraging increase of 3.6%—the highest in three decades.1 Japanese union leaders have been amplifying calls for wage hikes to exceed last year’s levels, with Prime Minister Fumio Kishida also urging the need for broader, sustained hikes that rise above inflation.

In late February, the Nikkei 225 also broke its highest level since 1989 (the year Nintendo’s Game Boy was first released), making Japanese stocks some of the best developed market performers thus far this year.2 Market exuberance over artificial intelligence (AI) at a “tipping point” and the sharp depreciation of the Japanese yen has led to even more foreign investors buoying Japan’s stock market.

Aggregate net profits for listed Japanese manufacturers grew more than 20% annualized for the April-to-December period,3 due to price hikes and brisk auto and machinery sales resulting from a solid US economy. In fact, the FTSE Japan RIC Capped Index, up 5.8% year-to-date, has seen its biggest gains from the auto-heavy consumer discretionary sector.4