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Nikkei 225 probes new highs in Japanese equity bull market

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Japan’s stock markets have been performing strongly recently. The Nikkei 225 Index was up by 15% in the last six months and hit a record high this week. The broader TOPIX Index has also been navigating new territory, up 16% in the last six months and +30% over the last 12 months.

This growth has partly been driven by a weakening yen, which benefits export-focused industries. However, the yen has been strengthening more recently. Japan’s 10-year sovereign bond yields hit their highest level since 2011 before easing this week.

Japan’s biggest union group reported a significant wage increase of 5.1%, the largest in over 30 years, though this was slightly below initial estimates. Consumer spending in Japan unexpectedly contracted in May, with household spending down 1.8% year over year. A weak yen and rising prices contributed to this decline.

Japan’s GDP for the first quarter was revised lower, showing a 2.9% annual contraction, worse than the initial estimate of 1.8%. This was due to corrections in construction orders, and the GDP estimates for the fourth and third quarters of 2023 were also revised downward.

What has been the key driver for the Nikkei 225?

There has been some correlation with uncertainty around the US presidential election. That uncertainty still remains and will weigh down many major stock market indexes over the summer months. Analysts are also expecting strong earnings from Japanese companies for Q2 2024 who might have been beneficiaries of the weaker yen. This has lifted exporters’ overseas profits, and they will be repatriating some of these over the coming months.

It is also noticeable that there are a number of Japanese companies that remain key suppliers of components for Apple NASDAQ:AAPL devices. Any positive news coming out of Apple – e.g. the recent news that Apple plans to increase iPhone shipments in 2H 2024 – seems to push these stocks higher.

Another area to keep in mind is semi-conductor manufacturing, in which Japan has a slice of the market. Gains in companies in the same space on Wall Street can also frequently be replicated on the Japanese stock market.


USD vs JPY could be critical

Japan has been a huge beneficiary of the weak yen and the fact that the Bank of Japan has not tightened monetary policy in the same way as the other major G7 central banks. Whether that will continue will also dictate how the Nikkei 225 trades in the second half of the year.

The USD/JPY pair may reduce its rise short term, driven by the strength of the US dollar, following the testimony of Federal Reserve Chairman Jerome Powell before the US Senate. He indicated an improvement in inflation figures but maintained the Federal Reserve’s cautious approach.

Additionally, the Bank of Japan may raise interest rates during its July meeting and reveal its plans to reduce bond purchases. Japanese Finance Minister Shunichi Suzuki emphasized the importance of maintaining fiscal discipline to enhance long-term confidence in financial health. He also mentioned that he will be closely monitoring the discussions at the Bank of Japan’s meeting regarding the bond market.

Japanese inflation ticking up slowly

On the economic data front, Japan’s Producer Price Index rose by 2.9% in June, accelerating from a 2.6% increase in line with market expectations. This marks the forty-first consecutive month of rising producer price inflation and represents the highest level since August 2023.

The Bank of Japan will also hold three in-person meetings with banks, securities companies, and financial institutions over the next week or so. The purpose of these meetings is to assess a reasonable pace for reducing its purchases of Japanese government bonds.

Further pressure on the Japanese yen could come from foreign asset purchases by Japanese individuals through the new tax-exempt investment program, the Japanese Individual Savings Account Program. The volume of these purchases is expected to exceed the country’s trade deficit during the first half of this year.

Related Japan Equities ETFs

Product Name Exchange Ticker Listing Currency
WisdomTree Japan Equity UCITS ETF – USD Hedged
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | EQi
DXJ USD

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