Can the Japanese stock market continue to reach new highs? Morgan Stanley continues to raise its forecast.

Following a nearly 30% increase last year, second only to the Nasdaq, Japan's main stock index, the Nikkei 225, has repeatedly broken its highest point in 33 years in January this year, coming close to the historical high of the 1990s. The Japanese stock market has become the most dazzling star in the global market.

According to Daiwa, although global markets have shown signs of overheating, against the backdrop of improved corporate governance in Japan, the Nikkei 225 is expected to reach its annual high of 38,000 points by mid-2024 (only a 5% increase from the closing price on February 6th), and is expected to be at 37,000 by the end of 2024. In terms of USD, the expected return rate by the end of 2024 is about 10%, and it is expected that the Japanese stock market will reach new highs in 2025:

The performance of Japanese stocks is significantly better than other major markets due to: (1) the tailwind brought by macroeconomic development (expectations of a soft landing in the US, depreciation of the yen, stronger-than-expected US demand), and (2) expectations and optimism for market reforms (disclosure of plans to improve capital return rates, inflow of foreign capital, and wage increases).

In the first half of 2024, we believe that Japanese stock indices may continue to rise, with the TOPIX expected to reach 2,700 points by mid-2024 and the Nikkei 225 reaching a high of about 38,000 points by mid-year.

In the second half of 2024, if the US economy experiences a soft landing, the Nikkei 225 is expected to stabilize at 38,000 points by the end of the year. Our most likely scenario is a mild recession in the US economy, in which case the Nikkei 225 will pull back to 37,000 points by the end of the year. In the event of a hard landing in the US economy, the Nikkei 225 is expected to decline to 34,000 points by the end of the year.

It is expected that the USD/JPY exchange rate will rise from 135 yen/USD to 140 yen/USD by the end of 2024.

Japanese Stocks Will Continue to Shine Globally

Daiwa pointed out that Japanese stocks have performed significantly better than other major markets this year, due to (1) the tailwind of the global macroeconomy and (2) market optimism driven by expectations of capital market reforms:

Since the beginning of 2024, Japanese stocks have risen for six consecutive sessions and reached new highs, coming close to the historical peak of the bubble era (38,915.9 points). Globally, Japanese stocks are undoubtedly one of the most outstanding assets.

Since the start of 2024, Japan has introduced a series of new policies, including adjustments to the Individual Savings Account (NISA) system, disclosure of capital efficiency plans, and extended trading hours in the stock market, continuously increasing the attractiveness of Japanese stocks to domestic retail investors and global capital. Automobile, wholesale trade, banking, and brokerage sectors have seen significant gains, while semiconductor and electrical sectors have also boosted the index with their cyclical growth. In contrast, the chemical and defensive value industries (transportation and services) have performed poorly.

According to Morgan Stanley, for the second half of the year, they will focus on the flow of funds from retail investors in Japan's domestic market:

While the Japanese stock market has seen a significant increase this year, retail investors in Japan have been selling off their holdings. From January 9th to 12th, retail investors sold a net amount of 1.07 trillion yen (approximately 7.2 billion USD) worth of Japanese stocks, marking the largest sell-off since November 2013.

We expect that with the launch of the NISA plan in 2024, individual investors' funds will flow into the Japanese stock market. We understand that it is reasonable for individual investors to take profits when wage growth does not keep up with inflation. In the future, we will focus on the flow of funds when market sentiment normalizes.

As part of measures to improve corporate governance of listed companies, the Tokyo Stock Exchange required companies with a price-to-book ratio below 1x to disclose plans to increase their capital return rate in March last year. According to their plan, the Tokyo Stock Exchange announced the first batch of companies disclosing their plans on January 15th this year, and they will continue to release updates on a monthly basis.

Morgan Stanley believes that the reform of the Tokyo Stock Exchange encourages listed companies to focus on capital costs and stock price management, and to enhance company value and stock prices through the use of cash and other means. This reform may improve the overall efficiency and attractiveness of the market, and stimulate investors' interest in the Japanese stock market, resulting in an expected increase in stock prices of about 20%:

We expect that corporate actions taken in response to the Tokyo Stock Exchange reform will be fully implemented before the shareholders' meetings in June. Based on these factors, we expect that the Japanese market will continue to outperform the broader market in the first half of 2024, although the upward momentum of Japanese stocks may temporarily weaken with the end of the negative interest rate policy. We expect Japanese companies to continue to raise their earnings per share guidance.

Morgan Stanley is optimistic about the long-term trends in the automobile and semiconductor sectors, and maintains an overweight rating on consumer-related industries and the financial industry:

(1) The transportation sector (automobiles) may maintain its strength for a long time;

(2) Semiconductors may rise along with the increase in US high-tech stocks;

(3) During the full-year earnings reporting season in May and the shareholders' meeting season in June, we expect value stocks to outperform other stocks as companies take more actions to respond to a series of reforms;

(4) We expect high dividend stocks to remain favored throughout the year as funds from individual investors are expected to increase;

(5) If it is confirmed during the "spring wage negotiations" that wages will further increase in 2024, we believe that the performance of consumer-related stocks (retail, food, daily necessities) may start to improve in the coming months;

(6) Financial stocks may experience short-term profit-taking as the negative interest rate policy ends, but we expect them to rebound as the Bank of Japan "moves towards" positive interest rates by the end of 2024. On November 29th, VESYNC spent HKD 5.6445 million to repurchase 1 million shares.