Rally in Japanese stocks: is it the end or is it just the beginning?

The Nikkei 225, the Japanese stock index, recorded a record-breaking 2023, and many investors are wondering whether 2024 will be a repeat of the previous year or whether we will see a season of deep red for Japanese stocks.
There are many variables at play: starting from the country's economy, which despite being positive shows contracting growth rates, moving on to the monetary policy decisions of the Bank of Japan (BOJ) and finally arriving at the strategic choices of the companies which make up the Nikkei 225 index, which will have to present satisfactory profits compared to the new expectations already incorporated into the new corporate multiples.
Faced with this uncertainty, which stocks and funds deserve to be followed more carefully to fully understand the dynamics related to the Japanese stock market? Is the rally that started in 2023 over? The Nikkei 225 recorded a notable stock market recovery during 2023 after years of stagnation and laterality.
Over the last year, the index has achieved an increase of almost 40%, outlining a strongly ascending graphic trend.
By way of comparison, in 2023, a year characterized by a significant recovery of global stock markets after a 2022 of marked declines, the benchmark index of the US stock market, the S&P 500, recorded an appreciation of approximately 24%.
The Nasdaq, an index full of shares linked to artificial intelligence and therefore in line with a rapidly growing sector, saw an increase of close to 50%.
Similarly, the MSCI World, considered the global index par excellence, showed growth of around 20%.
As a result, the Nikkei 225 has stood out for its performance, outperforming most other global indices in 2023.
This raises questions about whether that momentum can maintain its pace into 2024 or whether, for Japanese market participants, the time has come to capitalize on the profits obtained.
Focus on Japan's economy: is it time for new growth? A first element to take into consideration is the Japanese economy, which, from being stagnant, seems to be starting to show signs of recovery.
In 2023 it grew by 2.2% and for 2024 growth of just over 1% is expected.
Inflation is in positive territory, which, although it is creating problems for Western economies at the moment, is a positive sign for Japan.
The country faced a decade-long deflationary period that crushed spending and investments.
The situation was so critical that the Bank of Japan implemented unprecedented monetary policies, such as accepting negative interest rates.
This was to ensure that rates remained minimal in an effort to stimulate Japan's economy.
The newfound economic growth has revived company profits, and an increase of 11.5% is expected in 2024, according to Yerdeni Research.
This, accompanied by strong share buybacks, created a climate of euphoria among domestic and foreign investors, given the convenience of the yen.
And this is how many world-famous investors have medially exposed themselves in favor of Japanese shares: Warren Buffett, with the Berkshire Hathaway company, increased his holdings in Japan in 2023.
Will 2024 host new declines for Japanese stocks? Although Japan's economic growth remains positive for 2024, it is still expected to decelerate to 0.9%, as recently confirmed by the International Monetary Fund (IMF) in its global economic outlook.
This slowdown would not be a cause for concern in contexts similar to those of 2022 and 2023, however it generates alarm considering that the IMF itself has revised its global growth forecasts upwards to 3.1% for 2024.
The doubts that hover over the new year are numerous.
A first question mark concerns the activity of the Bank of Japan (BOJ), which, according to many observers, could decide to put an end to the negative interest rate policy in 2024.
Inflation, measured through consumer prices, showed signs of slowing down from October peaks of 3.3% to 2.6%, although remaining above the targets set by the BOJ.
These developments could lead to a strengthening of the Yen and a reduction in corporate earnings growth expectations, possibly negatively affecting the valuations of the Nikkei 225 index.
Does it make sense to expect a continuation of the increases? At the same time, it is important to remember that macroeconomic analysis is not an exact science, especially when used to interpret stock market price dynamics.
Not surprisingly, there are also positive factors worth considering, such as increased dividends and share buybacks, which actually stimulate demand for Japanese stocks.
Additionally, despite the appreciation in 2023, Japanese stocks remain cheaper than those in other geographic sectors, with a price-to-earnings ratio (P/E ratio) of 14 times earnings.
Japanese stock market: what to watch carefully? Looking at Buffett's investment, the stocks chosen by the Oracle of Omaha are Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo.
Instead, following the indications of world-famous investor Peter Lynch, it would be more sensible to focus on more familiar companies, such as Sony, Toyota or Nintendo.
For tracking the market as a whole, the Nikkei 225 index remains a popular solution, and there are numerous funds, both active and passive, that offer exposure to this geographic segment.
One of the largest exchange-traded funds is iShares MSCI Japan (EWJ), which offers diversified exposure to Japanese equities.