Japan’s Topix index soared to its highest level since 1990 on Friday before trimming some gains, supported by efforts to enhance shareholder returns and financial stocks benefiting from higher interest rates. The broad equities gauge rose as much as 1% to 2,821.86, ending the day 0.6% higher but short of its March 22 closing level, leaving it 2.6% away from the all-time record set in December 1989. The Nikkei 225 Stock Average also ended the day up 0.6%, continuing its strong performance earlier this year.
Value stocks such as banks and insurance companies led the gains, with sector indexes rising at least 2.4% as yields on 10-year bonds held above 1%. Inflation data for Tokyo released on Friday morning showed an increase in June, likely keeping a potential interest rate hike on the agenda for the Bank of Japan’s July meeting. Ryoutarou Sawada, a senior analyst at Tokai Tokyo Intelligence Laboratory Co., suggested that the Topix hitting a record high within a week is possible, driven by interest rate movements and efforts to reduce cross-shareholdings.
Banks have significantly contributed to the Topix rebound since its mid-April trough, with expectations that higher interest rates will boost their profitability. More broadly, companies have increased dividends and announced share buybacks at a record pace. Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management Co., noted that large-cap value stocks have been strong over the past three months, with high expectations for Japanese companies to manage their business cost-effectively.
A weaker yen has aided exporters, though it has also raised concerns about import costs and consumer sentiment, increasing the likelihood of official intervention to support the currency. Inflation expectations have risen to their highest level since at least 2004, strengthening the case for the central bank to raise interest rates. Fund managers from Fidelity Investments to Janus Henderson expect banks to benefit from the Bank of Japan’s shift, with a Bank of America Asia fund manager survey showing global investors most overweight in Japan’s financial sector.
Activists are increasingly pressuring corporate governance reforms, pushing some shares higher. They have made 100 investments in Japanese companies with a market value of around $318 billion, according to Bloomberg. The Tokyo Stock Exchange has supported these moves by taking steps to boost the appeal of Japanese stocks, such as listing companies that have released plans to improve capital efficiency. The exchange plans to widen the universe of stocks included in the Topix index while reducing the number of constituents, placing more emphasis on liquidity and pressuring companies to improve governance.
Rie Nishihara, chief Japan equity strategist at JPMorgan Securities Co., expressed optimism, expecting macroeconomic uncertainties that weighed on stock prices in the first half to diminish and corporate fundamentals to lead a market uptrend in the second half.
Japan’s Topix index has reached significant heights, driven by higher interest rates and efforts to improve shareholder returns. Financial stocks have played a crucial role, and ongoing corporate governance reforms are expected to further enhance market performance. The outlook remains positive, with expectations for continued growth in the second half of the year.
Fidelity Japan Trust PLC (LON:FJV) aims to be the key investment of choice for those seeking Japanese companies exposure. The Trust has a ‘growth at reasonable price’ (GARP) investment style and approach – which involves identifying companies whose growth prospects are being under-appreciated or are not fully recognised by other investors.
