The big development in Asia has been the blockbuster moves in the NKY225, which has added 2.4% and is on a flyer, with the bulls firmly in control and holding no concerns about supply, with price smashing through the all-time high (set on 22 March) of 41,087, with volumes picking up on the break to new highs.
The rallied started on April 19th, and since then index has surged 13.7% and has been the clear momentum play of any developed market.
In some capacity the move is not overly unsurprising give BoJ still have negative real policy rates, while looking tighten policy will do so at a glacial pace – the fact that the NKY225 is denominated in JPY, and the JPY relentless slide has offered a real tailwind, pushing the index higher, and working in favour of Japanese manufacturing and semiconductor exporters, both in terms of earnings and attracting capital.
Secondly, Japan’s 10-year government bond yield has edged up to 1.08%, boosting banks’ lending margins and improve the investment returns for insurance companies.
I believe this financial sector surge is also a crucial driver behind the Nikkei’s recent gains.
Thirdly, there’s a geopolitical wild card in play: some investors are betting on Trump’s potential return to the White House. His previous stance on placing a 60% tariff on Chinese goods could spark a seismic shift in risk asset allocation, while Japanese equities offer as a safe harbour in the Asian market space, contained from any potential political protectionist measures.
However, several constraints must be acknowledged – the real returns for the unhedged offshore investor seems somewhat inflated. USDJPY has climbed 14% YTD, contributing significantly to NKY225’s 25% rise. This means that a significant majority of the JPN225 index gains are currency-driven, diluting the actual performance. Moreover, unlike the tech-fuelled rallies in the US, Japan’s stock market is driven by high-dividend value stocks rather than growth stocks. This conservative tilt could act as a ceiling on further gains.
Despite these concerns, I remain optimistic about Japanese stocks and the index is strong for a reason. As long as the interest rate differential favours Japan and the country’s economic fundamentals remain sound, I believe NKY225 has room for further growth. It’s like navigating a ship through favourable winds—I’m inclined to buy on dips, confident in the long-term bullish outlook.
