Nikkei 225 erases year's loss as Japan outperformance continues

IN what has been an annus horribilis for most developed-market equities, Japanese investors find their stock benchmarks on the cusp of closing in positive territory for the year.

Helped by a weaker yen and continued stimulus by a resolute Bank of Japan (BOJ), the Nikkei 225 index has outperformed peers and erased its 2022 losses on an intraday basis in early trading on Monday (Aug 15). That compares with the MSCI World Index still down some 12 per cent and the MSCI Asia-Pacific Index down 15 per cent this year.

While central banks around the world have been tightening monetary policy amid rising inflation, Japan has defied convention and stuck to rock-bottom interest rates to bolster its stuttering economy. That has also pushed the yen lower - it's the worst performing Group-of-10 currency this year - and helped export-heavy Japan beat forecasts and deliver positive results.

A 4-week rally in US equities has also helped improve sentiment towards the global stock market, helping power more recent gains in Japan.

"US stocks have risen so much and the fact that Japanese stocks are being bought reflects expectations that the economy will not fall that far and that there will be a soft landing," said Mamoru Shimode, chief strategist at Resona Asset Management.

Strategists at Jefferies Financial Group including Sean Darby see tailwinds ahead that could help Japanese shares push on, including a pick up in money supply, consumer confidence on the brink of turning and a positive economic outlook relative to peers.

"As many economies slip into recession, slowdowns or indeed stagflation, Japan is producing a decent collection of investment ideas that seem to be overshadowed by the BOJ's unorthodox support of yield curve control," they wrote in a recent note. The team recommended investors consider a basket of Japanese value shares with exposure to the domestic economy.

The Nikkei rose as much as 0.9 per cent Monday to just under 28,812.

Still, not everyone is as positive. Although results from every sector beat or came in line with consensus earnings in the most recent reporting season, only 2 sectors - consumer staples and utilities - saw positive market reactions.

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And for foreign investors in Japanese shares, the Nikkei has still fallen about 14 per cent in dollar terms.

Koichi Fujishiro, a senior economist at the Dai-Ichi Life Research Institute, sees limited upside ahead for the blue chip gauge.

"The downside risk factor is still significant and with 4 months left in the year, it would be difficult for the Nikkei to reach the 30,000 yen level," he said. BLOOMBERG