Japan's Nikkei hits an all-time high thanks to reforms and strong corporate earnings

Both the Nikkei and the broader Topix were outperformers in the Asia-Pacific region, rising more than 10% so far this year after rising more than 25% in 2023 – their best annual gains in at least a decade.

Strong corporate earnings in Japan in the third quarter prompted equity strategists at Bank of America to raise their year-end 2024 forecast for the Nikkei 225 index to 41,000 from 38,500. They raised their forecast for the Topix index to 2,850 points from 2,715 points.

The rally was also supported by a weaker yen, which has fallen about 6% against the dollar so far this year and appears on track to fall to the 33-year lows it reached late last year.

Investors have been pouring money into Japanese stocks, taking a lead on Warren Buffett's bullish calls for Japan, and cheering the Japanese government's push toward greater corporate governance reforms — with the goal of forcing Japanese companies to boost shareholder returns.

Data from the Tokyo Stock Exchange showed foreigners invested More than 2 trillion yen was in the exchange's “major” offerings – the largest and most liquid stocks – in January.

Nikki I mentioned last week Net profits of listed companies in Japan for the fiscal year ending March 2024 could reach a record high for the third year in a row.

This comes on the back of record quarterly earnings for the October-December period, which increased 45% from the same period a year earlier and is 14% above consensus estimates, according to Goldman Sachs analysts.

Toyota, the world's largest car manufacturer, was among several Japanese companies that decided to do so Upgrade its earnings forecastwhich includes a greater profit margin and stronger revenues.

The recent gains in equity markets came on the back of a weak Japanese yen, which last reached 150.40 against the dollar, driven largely by the discrepancy between high US interest rates and Japan's ultra-loose policy.

Japanese Finance Minister Shunichi Suzuki was the latest in a series of government officials to express concern about the yen's weakness on Friday, and reportedly said he was monitoring the currency's movements with a sense of “urgency.”

Although the chronic weakness of the yen has supported some Japanese exporters, it has reduced the purchasing power of consumers in Japan.

However, the Bank of Japan has maintained the world's last regime of negative interest rates despite “core core inflation” – which excludes food and energy prices – having exceeded its 2% target for more than a year.

Market participants expect the Bank of Japan to move away from a negative interest rate regime at its policy meeting in April, once the annual spring wage negotiations confirm a trend for significant wage increases.

The central bank believes that wage increases will translate into a more meaningful spiral, encouraging consumers to spend.

But prolonged high inflation rates have hurt domestic consumption – the main reason Japan's GDP contracted for the second straight quarter, confounding analysts who had expected a modest expansion in the Japanese economy. This also means that Japan has ceded its position as the world's third largest economy to Germany.