Bull Market 2.0?How similar is this round of Japanese stocks at the beginning of the year to last year?

The Japanese stock market will start a continuous upward trend in 2024, constantly updating new 30-year highs, and approaching the peak of 1989 step by step.

On January 16, the Nikkei 225 index retreated, closing down 0.8% at 35,619.18 points, up 7.14% this year, while Japan's Topix index fell 0.8% to 2,503.98 points, up 5% this year.

Bank of America Merrill Lynch Japan equity strategists Masashi Akutsu and Tony Lin pointed out in a recent report that the strong rally in Japanese stocks in January this year is reminiscent of the gains in Japanese stocks from April to June last year, and there are many similarities between the two gains: 1. expectations of continued wage increases, and 2. simultaneous weakening of the yen and the dollar.

"Chundou" wages may exceed last year's

Analysts pointed out that an important factor in the sharp rebound of Japanese stocks last year was the "spring fight", the wage increase in 2023 refreshed the highest level in 30 years, and this year's situation may be more optimistic than last year, and the wage increase of "spring fight" seems likely to exceed last year:

The spring fight is a concentrated labor-management negotiation in Japan every spring, in which the labor representative of the Japan Federation of Trade Unions and the management representative of the Japan Keidanren negotiate the increase in the average wage for that year, and after the benchmark is determined, each company will announce the actual increase one after another.

In March 2023, the post-Spring Bucket wage increase ended up at 3.6%, the highest level in 30 years. In recent weeks, large companies in Japan have been announcing significant wage increases for their employees, and according to a survey of 100 companies by Japanese media, respondents expect wage growth at 5%, much higher than last year's forecast of 3%. This may also mean that wages will grow faster this year than last year.

As commodity prices fall and cost-push inflation wanes, a significant rise in wages is likely to have a significant impact on the market.

The yen may continue to weaken

Bank of America Merrill Lynch pointed out that the new governor of the Bank of Japan, Kazuo Ueda, took office in April last year, and his attitude was more dovish than the market expected, and the yen continued to weaken, supporting the rebound from April to June 2023, and now the market continues to delay the time for the Bank of Japan to exit the YCC also further pressure on the yen, and the dollar is also spurring the Japanese stock market due to the market's softening expectations for the Fed's interest rate cuts:

The simultaneous weakening of the yen and the dollar in March last year under the influence of the sudden collapse of Silicon Valley Bank was the best condition for the Japanese stock market (a weaker dollar has a stimulating effect on the global economy), and the entry of overseas funds into the Japanese stock market drove stock prices higher, led by blue chips.

This time the dollar also weakened significantly in anticipation of a rate cut by the Federal Reserve. Despite the recent strengthening of the US dollar, the yen is seen as further weakened in the eyes of the market as the Bank of Japan's exit from the negative interest rate policy will be delayed. As we have highlighted, a forex mix of a weaker US dollar and a moderately stronger JPY does not necessarily have a negative impact on Japanese equities.

Conversely, in recent years, Japanese equities have tended not to rise when the yen has weakened relative to cross-currencies but the dollar has strengthened against other currencies.

But Bank of America Merrill Lynch warned that valuations for Japanese stocks are not as cheap as they were in April-June last year, with the Japanese stock earnings ratio falling to 12 times in early 2023 (the bottom of its range) and a significant increase in the earnings correction index, leaving room for a sharp rise. The median price-to-earnings ratio is now 14x, and the earnings correction index is slightly better, suggesting that the Japanese stock index does not have as much upside as it did in April-June last year.

However, Bank of America Merrill Lynch also pointed out that given that the price-to-earnings ratio is not too high, the index still has a chance to rise further, if the price-earnings ratio rises to last year's peak of 14.5 times, then the Topix index is expected to reach 2,550 points, and if the price-to-book ratio is 14.2 times, then the Nikkei 225 index will reach 36,000 points.

Is there still room for Japanese stocks to rise in 2024?

Bank of America Merrill Lynch pointed out in the report that the global economy will recover further in fiscal 2024, when the effects of the Bank of Japan's ultra-loose monetary policy begin to be felt, so Japanese forward earnings per share (EPS) may rise further in the next 12 months.

In addition, since 2024, Japan has introduced a series of new policies, including the expansion of the tax-free holding retirement savings account program, the disclosure of capital efficiency programs, and the extension of stock market trading hours, to continue to improve the attractiveness of Japanese stocks to local retail investors and global large capital. This series of new measures will help Japanese stocks continue last year's glory:

January – New NISA launched: As one of the world's fastest-aging countries, household investment in Japan has been stagnant for decades. In order to change this, the Japanese government has adjusted the Personal Savings Account (NISA) system.

January 15 – Disclosure of capital efficiency plans: As part of the measures to improve the governance of listed companies, the Tokyo Stock Exchange on Monday announced the first batch of companies to voluntarily disclose capital efficiency plans. The list will be published on a monthly basis in the future.

The move is aimed at putting pressure on listed companies with price-to-book ratios below 1. A price-to-book ratio of less than 1 indicates that the stock price is lower than the dissolution value of the company, and since there are many companies with low price-to-book ratios in Japan, the Tokyo Stock Exchange asked listed companies to pay attention to working capital and stock prices in March last year. The TSE has warned that companies with low price-to-book ratios could be delisted as early as 2026.