Japanese Stocks Trade at Historic Highs

The Japanese stock market is experiencing a historic boom. The Nikkei 225 average has broken above the 43,000 yen mark, hitting new all-time highs day after day. With individual investors' assets also reaching record levels, a strong upward trend is evident across the entire market.

The Context: Why Japanese Stocks Are Surging Now

For decades, Japanese equities were often overlooked by global investors, trapped in a cycle of deflation and modest growth. However, recent years have seen significant shifts, including corporate governance reforms aimed at improving shareholder returns, a gradual exit from deflation, and a perception that Japanese companies were undervalued compared to their global peers. This confluence of factors has rekindled international interest, making Japan an attractive destination for capital seeking growth opportunities.

A significant driver behind the robust ascent of Japanese stocks is aggressive buying by foreign investors. There's a strong belief that pension funds and hedge funds from the EU, Arab nations, and China, among others, are reducing their exposure to U.S. equities and actively "preferring" Japanese stocks. According to a Morgan Stanley report, hedge funds increased their long positions in Japanese stocks last week while shorting Korean equities.

Foreign capital is particularly drawn to companies with global operations and significant overseas earnings, such as Sanrio, Zensho Holdings, Sushiro Global Holdings, ASICS, and Muji (Ryohin Keikaku). Funds also appear to be flowing into less-known 'quiet achievers' like SMC, THK, Horiba, Makita, and Taiho Kogyo, which boast high global market shares in various industrial sectors.

Interest Rate Cut Expectations and Persistent Yen Weakness

Key economic indicators, such as the U.S. Consumer Price Index (CPI), came in largely as expected, strengthening expectations for interest rate cuts by the U.S. Federal Reserve (FRB). This has supported the rise of global risk assets, including Japanese stocks, and contributed to a weaker dollar trend. While the dollar-yen exchange rate has been pulled down by the weaker dollar, Japan's negative trade balance suggests a long-term outlook for a weaker yen. Factors such as the continuous record highs of Japanese stocks, fiscal concerns, and political uncertainty also contribute to the yen's depreciation.

A Market of Euphoria and Caution

Amidst the continuous record highs, the market is also hearing voices of overheating and caution. Some investors express concerns, saying things like, "It's gotten so high it's scary," or "It's about time for another accounting scandal to emerge." Consequently, some investors are taking profits or reducing their leveraged positions. There have also been instances, such as Data Section, where popular stocks suddenly plummeted to their daily limit-down, indicating that investors are maintaining a cautious stance.

Regarding future market developments, while some anticipate further gains, others are closely watching for when a stock market correction might occur, aiming to buy on dips.

Notable Individual Stocks

Among individual stocks, Aeon (8267) is recommended due to consumer recovery and attractive shareholder benefits, SoftBank Group (9984) is surging on rumors of a PayPay IPO, and MUFG (8306) has hit a new all-time high. Trading companies like Sanrio (8136), INPEX (1605), Mitsubishi Corp. (8058), and Itochu Corp. (8001) are also drawing attention. Furthermore, interest is growing in stocks like Metapra and Remixpoint, which are noted for their correlation with Bitcoin.