Interview
Why ‘everything aligns’ for Japanese stocks
- Foreign investors are expected to gradually readdress underweight positions in Japanese markets after a seven-year period of net selling, with re-entry predicted every decade or so when conditions align for long-side investing.
- The market is projected to reach a Topix target of $2,200 in the near term before recovering to $2,400 by year-end and a 12-month target of $2,500, implying a potential 5% to 6% upside from current levels.
- A correction or pullback is anticipated over the summer due to extended technicals and seasonal weakness, followed by sector rotation occurring between September and December.
- Market sustainability depends on the momentum of thematic runs and the Tokyo Stock Exchange's commitment to structural valuation changes, with the market not considered overvalued until the proportion of companies trading below book value drops to 15-20%.
- Foreign institutional investors are expected to drive returns through foreign favorite stocks, including fast retailers and global leaders, while utilizing barbell strategies with liquid names trading below book value.
- Preferred investment sectors moving into year-end include machinery (specifically factory automation), electronic components, precision manufacturing, autos, and banks.
- Domestic demand is forecast to remain strong due to a virtuous cycle of rising prices and wages supported by high savings levels, alongside inbound tourism spending reaching pre-pandemic levels via higher-value visitors despite lower visitor counts.
- The Bank of Japan is expected to tweak yield curve control at its end-of-July meeting, though interest rate normalization is predicted to take longer than previously expected due to a data-driven assessment of inflation sustainability.
- Macroeconomic risks include a significant slowdown in China or the US, which would negatively impact the market due to revenue exposure, as well as potential tax increases by the Kishida government.