The Japanese equity market is forecast by Goldman Sachs Research to rally again in 2024, boosted by solid global economic growth and stock market reform.
The TOPIX, an index of Japanese stocks, is projected to rise about 13% to 2650 by the end of 2024. Our economists expect another year of growth outperformance across most economies, including Japan’s — the country’s real (inflation adjusted) GDP growth is forecast to expand 1.5% in 2024, compared with 1% for the consensus of economist forecasts surveyed by Bloomberg.
A key part of our analysts’ forecast is the Tokyo Stock Exchange’s company governance reforms, which they say “have been a game changer for the Japanese equities market.” The stock exchange has incentivized listed companies to boost valuations and earnings, and companies could potentially be delisted if they’re unable to show they’re using their capital efficiently. Investors see the unwinding of Japanese companies’ cross-shareholdings — shares that firms own in their business partners to maintain those relationships — as an indication of improved governance.
“Continued TSE pressure on corporates to respond to its requests will lead to a further acceleration in corporate governance-related activity amongst listed Japanese companies in 2024,” Goldman Sachs Research strategists Bruce Kirk and Kazunori Tatebe write in the team’s report.
The TOPIX has soared 24% this year (as of Nov. 10) in local currency terms, its fourth-best annual performance since 2001. The Japanese benchmark has significantly outperformed the S&P500 Index of US stocks and Hong Kong’s Hang Seng Index. That said, in US dollar terms, TOPIX is still under-performing the S&P500, which could explain why dollar-based investors have been reluctant to increase their Japan weightings this year, according to Goldman Sachs Research.
Foreign investment has flowed into Japanese stocks
Investment flows from foreign funds into Japanese stocks rose sharply between April and June amid expectations for stock market reforms.
Japan’s stock market had 10 weeks of consecutive net foreign buying in cash and futures, totalling 7.9 trillion yen ($53 billion) from April to June. The stock purchases were driven by TSE-related investor interest, as well as the positive impact of Warren Buffett's interview about Japanese equities with Nikkei Asia in April, according to Goldman Sachs Research. Foreign investors have been selling Japanese stocks in recent months (on net), but overseas flows are still positive for the year.
Foreigners and corporations are expected to remain net buyers of Japanese stocks, and domestic individual investors will become net buyers in 2024 with the new Nippon Individual Savings Account (NISA) — a program for small investments — poised to start in January.
“With Japanese households facing a sharp decline in real yields on bank deposits due to high inflation, we think the launch of the expanded `new NISA’ in January 2024 will encourage individuals to enter the stock market,” Kirk and Tatebe write. “Over the longer term, we expect households' exposure to the stock market to remain on a steady upward trend, and that the new NISA will become an important driver.”
The economic outlook for Japan in 2024
In addition to governance reforms, Japan’s stock market has also been driven this year by the expectation that the Bank of Japan would end its ultra-loose monetary policy and by a benign currency tailwind for Japanese exporters, Kirk and Tatebe write.
Our economists expect Japan’s real GDP growth to slow to 1.5% in 2024, from 1.9% in 2023 when the economy had a tailwind from reopening from Covid restrictions. They project expansion will stay above the potential growth rate (their long-term outlook is 0.9%). Private consumption, supported by wage growth and a one-off tax refund in summer 2024, is forecast to rebound. Goods exports are predicted to gradually increase in 2024, while inbound tourist consumption will likely return to a modest recovery after the post-pandemic surge this year.
After years of chronic deflation, inflation jumped in 2023 amid immense fiscal and monetary policy actions to jumpstart the economy. Our economists forecast core CPI (which excludes fresh foods) to remain above 2% in 2024. They expect wage growth will eventually lead to a tightening in Japan’s extraordinary monetary easing and the end of the Bank of Japan’s negative interest rate policy, once policymakers have confirmed a virtuous cycle of rising wages and services prices (though there’s uncertainty about when this cycle can be confirmed).
Japanese company earnings are forecast to rise
“Japanese companies' earnings momentum remains strong,” Kirk and Tatebe write. They forecast 12% growth in TOPIX earnings per share in 2023, 8% in fiscal year 2024, and 7% in fiscal year 2025. Growth next year is expected to be led by sectors that are recovering from cyclical downturns, such as electrical appliances, raw materials and chemicals, and machinery, as well as sectors including information and communication.
The TOPIX is predicted to rise broadly in line with the growth rate in earnings-per-share rate next year.
TSE's continued pressure on Japanese companies, meanwhile, is part of the reason the proportion of stocks that trade below book value has declined: The share of equities in the TSE Prime market below book has fallen from 52% at the start of January to 46% now, according to Goldman Sachs Research.
And cross-shareholdings, long regarded as a core governance issue at Japanese companies, are on the decline. The unwinding of these strategic holdings has been ongoing, and there are signs this trend is gaining momentum.
“We are now seeing signs of significant changes in cross-shareholdings that were once considered untouchable,” Kirk and Tatebe write. “Investors view company announcements regarding the unwinding of cross-shareholdings as an important indication of corporate governance improvement, and as share prices often react strongly as a result, we think this theme warrants continued attention in 2024.”
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