Asia’s top-performing market in 2023 was Japan, as the Nikkei 225 surged 28% to reach levels not seen since 1989.

At the close of 1989, the Nikkei reached all-time highs thanks to a bubble in equities and real estate. And when it did, Japan entered what is known as its “lost decade,” a time of severe economic downturn.

But it’s not the same as it was before.

In contrast to the late 1980s, real estate prices have not surged across the country in 2023, and structural changes have occurred in Japan.

A weakened yen has helped businesses achieve higher results by making items more competitive.

Businesses are also spending more; according to a Nikkei story dated June 23, capital expenditure by Japanese businesses is expected to reach a record $31.6 trillion yen ($221.03 billion) in fiscal year 2023.

According to the research, double-digit percentage growth in investments is anticipated for the second consecutive year for those made by Japanese corporations, which account for around two-thirds of their total investment in the country. Additionally, their foreign investment may rise by 22.6%, marking a third consecutive year of double-digit growth.

The outperformance of Nikkei has also been aided by foreign interest, which is supported by billionaire investor Warren Buffet’s optimistic view of Japanese stocks.

Japan’s higher yen and bigger potential for equity gains have made it a desirable location for overseas investors.

Global businesses are shifting their supply chains away from China, according to Dong Chen, head of macroeconomic research at private bank Pictet. This might be advantageous for Japan, “particularly in the very high end, more technologically dense sectors like semiconductors,” Chen stated in June.

″All these things are pointing to the right direction, we think that there are reasons to be more structurally positive about Japan than before,” he added.

Research Manager at Phillip Securities Research Peggy Mak predicts that the yen will do better in 2024.

Since the beginning of the year, the value of the Japanese yen has declined significantly; on October 31, it fell to 151.67, its lowest level versus the US dollar since 1990. So far this year, it has dropped 7%.

Mak currently believes that as interest rates start to decline globally, the currency could appreciate vs the US dollar. The currency would be supported by strong savings rates, real wage growth, and incoming tourism.

Yue Bamba, Blackrock Investments’ head of active investments for Japan, believes that the yen is cheap and “has room to strengthen” over the course of the next year or two.

“Our view on the currency is that we think the yen is undervalued and it has room to appreciate over the next few months, and that that is not detrimental to the stock market,” Bamba said.

It is anticipated that the Bank of Japan would abandon its ultra-easy monetary policy and loosen its yield curve control measures in the future.

The Bank of Japan has relaxed its yield curve management policy since Kazuo Ueda was appointed governor in February. As a result, rates on Japanese government bonds have surpassed 11-year highs. On November 1, the 10-year JGB yield reached 0.956%, the highest since April 2012.

But Ueda has reiterated that the BOJ will stick to its negative interest rate policy until it can “sustainably achieve” its 2% inflation target. The benchmark interest rate set by the BOJ is now -0.1%.

For 19 months running, the countrywide inflation rate in Japan has risen beyond 2%. For the thirteenth consecutive month, the so-called “core-core” inflation rate—which excludes the cost of energy and fresh food—came in at 4% in October, exceeding the 2% objective.

“Japanese real wages are growing, and the labor market is tight. Given Japan’s deflationary record, inflation is welcome, and so far, it seems healthy,” Ronald Temple, chief market strategist at Lazard Asset Management said in his 2024 outlook report.

According to Temple, the market will be watching for the “formal end” of yield curve management before turning its attention to the question of when the BOJ would stop its negative interest rate policy.

According to Lombard Odier senior macro strategist Homin Lee, worker confidence in unions is increasing, and labour demand in the service sector is robust, therefore he believes that 2024 will be a “solid” year for wage increase in Japan.

Lee emphasised that during the spring salary discussions in 2024, the Japanese Trade Union Confederation anticipates a 5% wage hike.

“The indication for 2024 suggests wage growth will be sufficient for the BoJ to consider ending NIRP,” Temple said.

Lee projects that Japan’s wages will rise by 1.2% in 2024, which will boost corporate investments and consumer spending in the country. Japan is the third largest economy in the world.

(Adapted from NedwsBreak.com)

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