The Japanese stock market has been hot lately. The Nikkei 225, Japan’s leading stock index, closed at 30,808.35 on May 19, a 33-year high since the bubble burst in August 1990 (see graph). The index has continued to rise, hitting a 52-week high of 31,560.43 on May 29. The Nikkei 225 index, which is comprised of 225 of Japan’s leading large-cap stocks, is up more than 20% so far this year. The TOPIX index, which reflects all stocks listed on the Tokyo Stock Exchange’s main market, is also on track for its best performance in more than 30 years.

Foreign net buying continued for the seventh consecutive week through the second week of May, bringing net purchases to nearly 3 trillion yen ($2.84 trillion), according to the TSE. On May 30, Japan’s Nihongeizai Shimbun reported that foreign investors bought about ¥5.6 trillion ($53 trillion) worth of Japanese stocks from the beginning of April to the third week of May. Domestic investors are no exception. According to the Korea Depository Receipts and Payments Corporation (KDB), the amount of Japanese stocks held by domestic investors (Japanese ants) stood at $2.958 billion (about 3.9 trillion won) as of May 29. This compares to $2.6109 billion (about 3.44 trillion won) last year, an increase of about 462.5 billion won.

The Buffett Effect draws investors to Japan
Various factors have been cited as the reason for the surge in the Japanese stock market, which was mired in a prolonged recession that has been described as the “lost 30 years. One of the most popular is the Buffett Effect. During a visit to Japan in mid-April, Berkshire Hathaway Chairman Warren Buffett announced in an interview with the Nihongeizai Shimbun that he had increased his stake in Japan’s five largest conglomerates to 7.4%. In August 2020, the company disclosed that it had increased its stakes in Itochu Corporation, Mitsubishi Corporation, Marubeni Corporation, Mitsui Corporation, and Sumitomo Corporation, which it had previously disclosed as holding more than 5%. Buffett also said at Berkshire Hathaway’s annual shareholder meeting in early May that “Japan is a better place to invest than Taiwan”.

However, this alone does not explain the recent surge in Japanese stocks. “While Buffett’s comments may have drawn investors’ attention to Japanese stocks, the market’s strength has been driven by Japan’s first-quarter economic growth that beat market expectations, a weaker yen, and the Bank of Japan’s (BOJ) ultra-accommodative monetary policy,” explains Moon Nam-joong, a researcher at Daeshin Securities.

Japan’s gross domestic product (GDP) grew 0.4% quarter-over-quarter in Q1, beating market expectations of 0.2%. Personal consumption, which accounts for more than half of GDP, led the gains in services such as travel and eating out, which are estimated to reach an annualized rate of 1.6% if the trend continues. This is the third quarter in a row that Japan’s economy has returned to positive growth. According to data released by SMBC Nikko Securities on May 14, the 토토사이트net profit of Japan’s major listed companies for fiscal 2022 (April 2022-March 2023) is estimated to surpass the previous record of 34 trillion yen ($32.87 trillion) in 2021.

The yen’s exchange rate against the dollar was around 139 yen as of May 31. While this is below the 150 yen level seen in October last year, it is still weak, which is helping Japanese exporters to improve their earnings and is favorable for the stock market. The BOJ’s ultra-accommodative monetary policy is also a factor in Japan’s stock market performance. BOJ Governor Kazuo Ueda, who took over in April, has kept his predecessor’s money-printing policies in place: yield curve control (YCC), which keeps the 10-year JGB rate at nearly 0%, and a benchmark interest rate of -0.1%.

Inflation is the foundation for a virtuous cycle
Some observers attribute Japan’s strong stock market performance to the fact that the country, which has long suffered from deflation (falling prices), recorded its highest inflation rate in 41 years (4.1%). “In general, inflation is a bad thing, but it may have been a good thing for Japan, which has been suffering from chronic inflation,” said Han Ji-young, a researcher at Kiwoom Securities. “As inflation rises, corporate earnings may also rise, creating a virtuous cycle.”

From a global perspective, there is a sense of money flowing out of China and into Japan. Chinese stocks have become less attractive to foreign investors due to China risk and the Chinese government’s closed-door policy of blocking economic information abroad. In addition, as global supply chains are reorganizing around Japan, which is more friendly to the U.S., money is flowing out of China and into Japan.

However, there are mixed views on whether the current trend will continue in the second half of the year. “While many countries are currently experiencing poor corporate profits, Japan is holding up relatively well, so we can watch with some expectations,” said Han Ji-young. On the other hand, Moon Nam-joong said, “The Q2 GDP, which will be released on August 15, should confirm the continuation of the economic growth that was confirmed by the strong Q1 GDP and the resolution of the BOJ’s monetary policy uncertainty before we can have expectations for the second half of the year.” As for the BOJ’s monetary policy uncertainty, the interpretation is that a change in monetary policy remains possible, as the BOJ stated at its April monetary policy meeting that it will “begin to verify the adverse effects of large-scale monetary easing while drawing the line at hasty tightening as detrimental to achieving the inflation target”.

When it comes to investments, there are different opinions. While Han Ji-young said, “It’s okay to have some exposure to Japanese stocks,” and recommended following the Nikkei 225 or Topix index, Moon Nam-joong said, “I think it’s difficult to see a continuity in the strength of the Japanese stock market, so I recommend investing after the aforementioned anxiety factors are resolved.”

Japanese semiconductor ETFs were the top net buyers in May

According to the Korea Depository Receipts and Payments Corporation, the top Japanese stocks that were net buyers by domestic investors in May were the Global X Japan Semiconductor ETF, which invests in Japanese semiconductor equipment and materials companies, the iShares U.S. Bond 20-Year Yen Hedged ETF, the Next Fund Nasdaq 100 ETF (currency exposure), sporting goods company Asics, motor manufacturer Nidec, Shin-Etsu Chemical, Mitsubishi Corporation, semiconductor electronics maker Rohm, Itochu Corporation, and Yaskawa Electric.