Japan equities outlook Q4/2024

In Q3 2024, Japan’s stock market saw a historically high volatility. After reaching a new high in early July, it dropped steeply in late July due to weaker U.S. economic data and a rate hike by the Bank of Japan. The market stabilised through August and September, but news of Shigeru Ishiba becoming Japan’s next prime minister after winning the conservative ruling party’s leadership vote at the end of the quarter triggered another significant drop. Investment experts are now debating the outlook for Japan equities in the coming month.

“We’ve witnessed both macro- and micro-economic driven surprises and ensuing volatility in the third quarter, and with former defence and agriculture minister, Shigeru Ishiba’s, unexpected win at the end of the quarter to be Japan’s next Prime Minister, we might well expect this volatility to continue,” said Carl Vine, Co-Head of Asia Pacific Equities at M&G Investments.

Volatility in October continued, with Japanese stocks rising after the ruling LDP lost its single-party majority in the lower house in the snap elections in late October.

“Commentators we follow trumpeted that Japanese stocks’ political fundamentals changed overnight, but we think the results just bring long-running weakness more into public view,” commented Fisher Investments UK. The asset manager emphasises that “reform prospects are a consistent driver for Japanese stock returns.”

While Japan boasts strong assets in human capital and technology, structural challenges like complex ownership structures, a lifetime employment culture, and “zombie companies” hinder productivity and innovation, opines Fisher Investments. They highlight that past pro-reform leaders, such as Abe and Koizumi, provided tailwinds to the market, but recent leaders, including Kishida, have lacked the political capital to advance reform. Following Ishiba’s win, the asset manager believes “expectations for reform already seemed pretty low,” signalling no major shift for Japan’s markets.

Japan equities: Earnings are what matters

Market experts point out that it is corporate earnings that matter in the end. In the April-June quarter of 2024, Japanese nonfinancial companies achieved record-high combined ordinary profits of ¥35.768 tn, marking a 13.2% increase from the previous year. This robust performance was driven by both manufacturing and non-manufacturing sectors, bolstered by the yen’s depreciation and successful cost pass-through to consumers.

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With the mid-year earnings reports now underway in autumn and the subsequent results in January, sustained strong earnings could shift market focus away from domestic politics, laying the groundwork for equity gains into 2025.

Nomura is pointing to the economic resilience in Japan. “Japan’s discretionary sector is benefiting from improving consumer confidence, wage growth, and government policies aimed at stimulating consumption, creating a favourable environment for revenue growth,” Gareth Nicholson, CIO and Head of Managed Investments, International Wealth Management, said.

Lazard Asset Management expects “continued market choppiness over the next three-to-six months” but maintains a positive outlook for Japan equities, citing “corporate governance improvements and the shift from a deflationary period to an inflationary one”.

“We expect the regulatory reforms of the past year to continue to drive corporate governance improvements, better capital efficiency, and higher shareholder return, and we expect the gradual shift from a deflationary period to an inflationary one to drive a transformation of the Japanese economy,” Lazard’s October outlook states.

In the meantime, the Tokyo Stock Exchange extended its trading sessions by half an hour. It opens from 9 a.m. and now closes at 3:30 p.m. It is the first extension in 70 years.

Market observers remain sceptical that this will have positive effects since the trading hours are still shorter in comparison to other major stock exchanges.

“The trading volume is not expected to increase dramatically only with a 30-minute extension,” said Atsushi Kamio, a senior researcher at Daiwa Institute of Research.