Weak yen fuels Japan’s 2023 equity rally during foreign demand

ONE of the world’s biggest share market rallies this year in Japan may be extended if foreign investors become even more bullish in 2024.

The Topix index and the Nikkei 225 Stock Average both touched 33-year highs and rose more than 20 per cent so far for 2023, beating most equity benchmarks in the rest of Asia. Gauges that track Japanese carmakers and electronics companies surged at least 33 per cent as the yen depreciated against all major currencies. That was fuelled by signs that the Bank of Japan is in no hurry to alter its ultra-loose monetary policy. 

Even with the yen’s rally since early November, Japanese stocks may stay solid given that the currency remains relatively cheap and corporate earnings have become less susceptible to foreign exchange fluctuations. Overseas investors have also cheered Japan’s push to increase companies’ shareholder value. 

“Investors outside of Asia – such as those in the US, Europe and the Middle East – are also interested in Japanese equities,” said Masashi Akutsu, chief equity strategist at BofA Securities in Tokyo. “If they are really convinced that Japan will improve, they will raise their rating, and then funds will come in line with the fundamentals.”

Foreign investors were net sellers for only three months this year as at November, indicated data calculated by the Tokyo Stock Exchange. 

Other sector winners included trading companies that climbed after billionaire Warren Buffett increased his stake in the sector’s largest businesses. Among the Topix’s 33 sub-indexes, pharmaceutical companies were the only group to decline this year after a series of clinical trials faced setbacks. 

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This is a list of some notable sectors: 

Semiconductors

Shares of Screen Holdings have surged 172 per cent this year, making it one of the Nikkei 225’s best performing stocks, while Advantest and Renesas Electronics both more than doubled. Semiconductor-equipment suppliers have been in focus as Taiwan Semiconductor Manufacturing Co considers building a third plant in Japan, which is pushing to use extra budgeting to support chip infrastructure. Analysts have also pointed out that semiconductor equipment suppliers are seeing signs of a recovery. 

Carmakers 

The car sector made the list of top performers as the yen depreciated in November to a one-year low of 151.91 per US dollar, helping exporters post record earnings. The Topix subindex for car companies is set for a year-to-date gain of 36 per cent. Toyota Motor is on course for its best year since 2013 with a gain of 40 per cent. 

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Trading companies

The five trading firms that Buffett favoured earlier this year – Mitsubishi, Mitsui, Sumitomo, Marubeni and Itochu – are all up at least 35 per cent since a report in April said he raised holdings in the sector. Investors are watching for what he buys next after Berkshire Hathaway sold yen bonds in November. The Topix’s Wholesale Trade index, which includes those companies, has climbed more than 37 per cent this year.  

Pharmaceuticals

A slew of bearish signals emerged from the pharmaceutical sector, the year’s only Topix’s sub-index loser. Those included a more than 50 per cent slump in Sumitomo Pharma that made it the biggest decliner in the Nikkei 225. In July, the drugmaker and Otsuka Pharmaceutical said that its schizophrenia treatment Ulotrant did not meet the primary endpoint in phase 3 Developing Innovative Approaches for Mental Disorders 1 and 2 clinical studies. Eisai also lost 20 per cent this year after a Keytruda trial to treat a type of cancer in the uterus did not meet the dual primary endpoints of overall survival and progression-free survival. 

“I think investors need to be very picky for (the) Japan healthcare sector,” said Tina Banerjee, a healthcare analyst who publishes her insights on the Smartkarma platform, based in Mumbai. “Companies with promising late-stage pipeline should be the winners.” BLOOMBERG