Japanese companies achieve record profits! The Nikkei Index is gathering momentum to break the historical high point of 1989.

Zhitong App has learned that in the three months ending last December, Japanese companies have achieved record quarterly profits, which may greatly boost Japan's blue-chip stock benchmark index - the Nikkei 225 Index, to surpass the historical high set in 1989. The Nikkei 225 Index reached 38,742 points in intraday trading on Tuesday, approaching its historical high of 38,957 points set in 1989 during the burst of the Japanese bubble economy in the Heisei era.

According to data compiled by institutions, the overall net profit of companies in the TOPIX 500 Index increased by 46% year-on-year from October to December, reaching a record high of about 13.9 trillion Japanese yen (approximately 930 billion US dollars). Excluding Softbank Group Corp., which saw a surge in profits due to a low base effect, the overall net profit still increased by 25%.

Under the leadership of Masayoshi Son, Softbank Group has made significant investments in numerous global technology companies, resulting in significant fluctuations in net profits. The latest financial report data shows that Softbank Group achieved a net profit of 950 billion yen in the third quarter of the 2023 fiscal year, reversing the loss of 783 billion yen in the same period last year, marking the first profit since September 2022. The Vision Fund recorded a profit of 422.74 billion yen during the same period, compared to a loss of 660.1 billion yen in the same period last year.

The improvement in profits of Japanese companies brings a record profit outlook - the overall net profit of companies in the TOPIX 500 Index has been continuously increasing.

The strong growth in performance indicates that the strong upward trend that has driven major Japanese stock indices to record highs may continue for a longer period. From global asset management giant BlackRock Inc. to Robeco Institutional Asset Management, and even to Berkshire Hathaway under the "Oracle of Omaha" Warren Buffett, large overseas investment institutions are generally optimistic about the long-term bullish trend in the Japanese stock market.

According to Yue Bamba, head of BlackRock's active investment business in the Japanese stock market, the potential scenario of the long-awaited exit of the Bank of Japan from ultra-loose monetary policy may have an unusual impact, especially in potentially making the Japanese stock market one of the beneficiaries of the Bank of Japan's interest rate hikes. The head of the strategy pointed out that Japan's inclination towards a loose environment contrasts sharply with the significantly restrictive monetary environment in Europe and the United States. In addition, the undervalued Japanese stocks have a significantly lower weight in global investment portfolios compared to European and American stock markets. This implies that there will be a larger scale of global capital inflow into the Japanese stock market in the future. A potential 10-15% increase in the yen exchange rate could even be seen as "positive news" for the Japanese stock market.

It is reported that unexpectedly strong U.S. economic data and the depreciation of the yen have boosted many Japanese car exporters, including Toyota. Some domestic Japanese companies are benefiting from the trend of inflation in Japan, allowing them to raise prices. The corporate governance improvement measures led by the Tokyo Stock Exchange have also made global investors more optimistic.

"There has been a change in the company's mindset." Takashi Hiroki, Chief Strategist at Monex Securities, said, "We will see more and broader price increases as companies are able to pass on cost increases, supporting their stable profit margins and higher stock prices."

Global automotive giant Toyota is one of the representative companies raising performance expectations. Due to the strong recovery of hybrid cars and robust demand in the United States, Toyota executives expect annual profits to be more optimistic than previously expected. In addition, the resilient U.S. economy has also boosted the performance of Japanese companies. The United States is one of the most important demand countries for Japanese export goods, and the strong U.S. market has helped boost the performance of many Japanese listed companies.

As of December last year, the Japanese economy had experienced economic contraction for two consecutive quarters, meeting the common definition of a "technical economic recession." Despite the technical recession, Japanese companies are still able to raise prices, allowing more companies to increase profit margins. This is mainly because Japan's persistent inflation rate allows companies to pass on the continuously rising costs to consumers, and the trend of rising wages in Japan supports consumers' acceptance of higher prices.

The recovery trend of technology companies' performance still raises questions, while tourism and food companies show strong performance

Despite overall corporate profit growth, the performance of some industries remains weak. Some technology companies in Japan, especially those in the semiconductor equipment and raw materials sectors, as well as the electronic components sector, have significantly lowered their annual performance expectations. Their stock prices have performed poorly, indicating that the long-awaited recovery in the chip industry is still incomplete. These companies include Alps Alpine Co., Ibiden Co., and Taiyo Yuden Co.

Meanwhile, companies such as factory automation equipment manufacturer Omron Corp., which rely on demand from the Asian region for profits, have also been impacted to varying degrees, mainly due to weak demand in the Asian region since 2023.

On the other hand, the best-performing companies are concentrated in the tourism services and food manufacturing sectors in Japan, as they benefit from rising prices and a surge in the number of overseas tourists visiting Japan.

The operating profit margin of Oriental Land Co., the operator of Tokyo Disneyland, is as high as 35.5%, the highest level since at least 2005. The East Japan Railway Company and the Central Japan Railway Company have significantly raised their performance expectations. The well-known Japanese snack producer Calbee has also far exceeded market expectations after initiating a price increase strategy.

According to a report led by Morgan Stanley strategist Rie Nishihara, Japanese companies achieved an average operating profit margin of 10% in the previous fiscal quarter, surpassing the 8.4% from the same period last year, which was the highest level in years. Institutional compiled data shows that Toyota's operating profit margin in the last quarter reached 14%, the highest level since at least 2001.

Not only expected to reach historical highs, but also possibly surging towards 40,000 points

As the Nikkei 225 index approaches the historical peak set in 1989, the strong overall profit data of Japanese companies has significantly reinforced the optimism of global investors. In recent days, some analysts who are bullish on the future market performance of the Japanese stock market have raised the target points of this benchmark stock index.

Arnout Van Rijn, the fund manager of Robeco Sustainable Multi-Asset Solutions investment fund, wrote in a report last week, "Japanese companies are facing pressure from domestic and foreign investors, government agencies, and financial market regulators to return more capital to shareholders." He stated that the team has been consistently bullish on the Japanese stock market, using investment derivative indicators to predict that the Japanese stock market will continue its recent high trend.

Wei Li, a portfolio manager of multi-asset quantitative solutions at BNP Paribas Asset Management in France, also has a positive outlook on the future market performance of the Japanese stock market, rather than the yen exchange rate and Japanese government bonds, as he believes that the Bank of Japan's interest rate hike will be gradual and the monetary environment will remain accommodative. Wei Li stated in an interview last Thursday that the Bank of Japan's interest rate hike will not quickly boost the currency or make sovereign debt attractive.

Wei Li emphasized that the corporate governance reform measures led by the Tokyo Stock Exchange are an important reason why foreign investors are optimistic about the Japanese stock market. "Increasing holdings of Japanese stocks is the current consensus in the market, but the proportion of global investors' positions in the Japanese stock market is still relatively low," Li said. "The scale of funds flowing into the Japanese stock market is still in the early stages, and the scale of foreign capital inflows may further support the Japanese stock market outperforming most global stock markets."

Toshio Morita, Chairman of the Japan Securities Dealers Association, recently stated that the Nikkei 225 index could rise to between 42,000 and 43,000 points this year. In addition, according to Japanese media reports, large financial institutions in the country have been increasing their staff size, focusing on market traders with experience in rising interest rate environments.

According to the above statistics from the Tokyo Stock Exchange, as of the week ending February 9th, foreign investors had a net purchase of approximately 817.43 billion yen (about 5.44 billion US dollars) in local Japanese stocks, marking the largest single-week net purchase level in the Japanese stock market since January 12th.