Japan’s stock market rebounds to near record highs despite last year’s crash

A year after the yen’s sudden rebound rattled markets, Japanese stocks are now steady. They’ve been supported by clearer BOJ guidance, corporate reforms, and a softer US tariff deal.

Japan’s stock market has withstood two fierce downturns, including a substantial reversal of the carry-trade approach, where traders leverage cheap yen funding to acquire more profitable overseas assets.

On August 5, 2024, a surprise interest-rate rise at the Bank of Japan sparked about a 12% downturn in the country’s leading indices, erasing more than $670 billion in equity value. Today, the Topix is once again trading near its all-time peaks as per Bloomberg.

The current rally looks a lot like last July’s failed surge, but investors are reassured by clearer BOJ messaging, steady corporate reforms, and a softer US tariff deal.

“It looks like a lot more stable of an environment for the market to go higher,” said Pelham Smithers, who leads a Japan equity research firm in the UK. “I think there’s room for further rate hikes, which it hasn’t felt like before.”

Yen rises on weak U.S. jobs data, nudging Japanese stocks lower

The yen’s fluctuations continue. Following weaker-than-expected US employment figures last Friday, it gained roughly 2 % versus the dollar. Monday saw the Topix and Nikkei 225 dip slightly above 1 %, driven by fresh concerns about an economic downturn. As of Tuesday at 8:25 a.m. in Tokyo, the currency was hovering near ¥146.75 per US dollar.

Compared to last year, when the yen jumped 10% in one month and August’s crash was much worse, this week’s swings are mild.

Clearer BOJ communication has helped. The BOJ’s unexpected 15 bp increase last July fueled a yen spike and compelled numerous traders to reverse their leveraged positions.

In response, the board now mandates that at least one member deliver a public address and conduct a press briefing prior to every rate meeting.

Prior to its most recent 25 bp lift to 0.5 % in January, which marked the biggest increase in nearly two decades, Deputy Governor Ryozo Himino signaled the change ten days early, later ratified publicly by Governor Kazuo Ueda. Even with the scale of that adjustment, market participants had time to adjust, and a rally in bank stocks supported broader gains in the subsequent week.

“The BOJ’s decision to raise rates again in January, despite last summer’s turmoil, made it clear that the rate-hike path will continue,” said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management. “It’s become easier to envision future rate-hike scenarios.”

According to Smithers, after recovering from last summer’s plunge and the April sell-off linked to trade frictions, Japanese equities exhibit increased resilience. “We got out a bit of hot money with the two flash crashes,” he noted. “The people in the market right now are the ones who believe in Japan.”

Foreign investors drawn by reforms and buybacks

Much of that confidence comes from foreign investors drawn by record buybacks and the hope that governance reforms will unlock hidden value.

“Governance reforms and shareholder returns, far from peaking, are scaling new heights,” said Sunny Romo, an investment director of Japanese equities at M&G Investments. She added that this points to more room for stocks to climb, as global investors seek to diversify beyond the US.

Local strategists also identify growth opportunities within Japan/

Following a setback at the polls, renewed pressure from opposition parties to lower the consumption levy is mounting, and could support consumer-facing and other domestic-oriented industries.

Analysts from Goldman Sachs Japan and Bank of America Securities have lifted their near-term targets for the Topix and Nikkei, pointing to a tariff agreement capping duties at 15 %.

But it all depends on the yen staying stable amid trade-driven swings.

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