Hiroyuki Ueno, chief strategist, and Katsutoshi Inadome, senior strategist at SuMi TRUST, discuss Japan’s outlook for 2024.

A Japanese asset management house thinks the country's equity market could hit another historic high in 2024 because corporate earnings' growth will offset the negative impact of an appreciating yen/dollar exchange rate. 

Hiroyuki Ueno and Katsutoshi Inadome at Tokyo-based asset manager SuMi TRUST predict that there will be a robust stock market, mild inflation and a rising yen in Japan in 2024, according to a note this week. Sumitomo Mitsui Trust Asset Management's stance on markets carries a lot of weight: it has $575 billion assets under management and works with institutions and multi managers in the UK, Europe, Middle-East and Asia.

“In 2024, we expect to see mild inflation in Japan with improvements in corporate performance, steady wage increases, and a solid recovery in inbound tourism. We also expect that the Bank of Japan (BOJ) will end its yield curve control policy in the first half of 2024,” the managers said.

“The Nikkei 225 may reach a new historical high backed by steady corporate earnings growth, despite the Japanese yen's appreciation against the US dollar,” they added. “The new Nippon Individual Savings Account (NISA), a tax exemption programme beginning in 2024, and the pressure from the Tokyo Stock Exchange (TSE) to improve capital efficiency will serve as tailwinds.” (Since 11 November 2023, the dollar-yen rate has depreciated from Y151.52 to fetch Y144.6 as of 4 January this year. The rate had risen from Y133.34 on 5 January last year.)

Other wealth managers, such as Swiss private bank Union Bancaire Privée, DWS and GMO Asset Management, are also positive about Japanese equities in 2024. German asset manager DWS' top pick for Asia is Japan, both from a valuation perspective and in terms of earnings' growth. But UK wealth manager Brown Shipley is more cautious about the outlook for Japanese equities in 2024, seeing it as a more risky market, also as the yen strengthens against the dollar. (See more here, here and here.) Investors believe that the country has benefited from corporate governance reforms that encourage cash-rich firms to raise dividends and capital spending, among other changes.

Inflation
“A recovery of consumption supported by wage increases, an increase in capital investment, and the recovery of inbound tourism will underpin inflation,” they said in a note. “In 2023, personal consumption was restrained due to rising prices, but in 2024, it is anticipated that real wage growth will turn positive. An increase in capital investment in areas such as automation is expected to continue, leading to further improvements in productivity and efficiency.” 

Monetary Policy
“There is increasing speculation about the early termination of the BOJ's negative interest rate policy. Given the need to avoid excessive yen appreciation and a weak dollar, the BOJ may want to lift the negative interest rates before the US begins cutting rates,” Inadome said. “However, after the elimination of negative interest rates, there may not be any policy changes for a while to assess the impact on the economy and other factors.” 

The Yen  
Inadome reflected on what the Yen exchange rate's behaviour means for wider economic performance.

“The Federal Open Market Committee (FOMC) projection of three interest rate cuts throughout 2024 in December resulted in a significant appreciation of the yen and a weakening of the US dollar,” Inadome said. “Given the divergence in monetary policy between the BOJ and the Federal Reserve, the narrowing interest rate gap may increase upward pressure on the yen.” 

“The [dollar/yen] range we expect in 2024 is 125 to 145. The volatility will remain high in the first half of the year, affected by the monetary policy both in the US and in Japan, and the yen will gradually appreciate to 125 against the US dollar toward the end of the year,” he said. 

The stock market
Ueno and Inadome believe that the Japanese stock market in 2024 will be robust, supported by economic growth underpinned by mild inflation, measures to improve capital efficiency implemented by the government and the stock exchange, and the launch of the new NISA system. “There is a rising risk of economic downturn in China, which could increase the flow of funds to Japan as an alternative destination in Asia,” they said.

Risk factors
“Risks factors include the possibility of worsening conditions in the Chinese economy, prolonged geopolitical risks, and excessive strengthening of the yen. The real estate market in China has not yet fully recovered and remains in a stalemate,” Ueno and Inadome said. “While the Chinese government has confirmed its intention to strengthen proactive fiscal policy through measures such as issuing an additional 1 trillion yuan of government bonds and reaffirming this stance at the central economic work conference in December, the specific details are lacking, and this continues to pose risks.”