Japan Inc. is doing a phenomenal job: Morning Brief

Julie Hyman

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All of a sudden, Japanese stocks are in vogue. The Nikkei 225 Index’s 18% rally this year has left the S&P 500 in the dust and sent the average to a 33-year high.

Strategists think the run can continue – and even potentially take out the 1989 record.

If Japan hasn't really been on your radar, there's something shifting across the Pacific.

It has to do with fundamental reforms that Japanese companies are making, explained Atul Goyal, managing director at Jefferies, in an interview with Yahoo Finance.

“Japan Inc. is doing a phenomenal job,” Goyal said. He’s covered Japanese companies for almost 20 years, with stocks like Softbank Group and Sony currently in his coverage. He said that what's more profound than the new stock highs is the idea that there’s real cultural change occurring in corporate Japan.

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“I’ve been a Japan skeptic,” Goyal said. “We are at a juncture where a lot of push is happening in Japan where there is possibility of naming and shaming if the companies do not do the right things. Collectively, thousands of companies are going in the right direction to improve their return on equity.”

The “right things” include actions like divesting underperforming businesses and raising prices.

Bank of America is so encouraged by the recent sea change that strategists led by Masashi Akutsu raised their year-end target on the Nikkei to 32,500 (5% above Wednesday’s close) and said the index could make new record highs by early 2025.

“Japanese companies have changed significantly since the introduction of the Corporate Governance Code in 2015, but under the deflationary regime, [return on equity] did not improve much in terms of global standards,” Akutsu wrote in a note this week. “This time, signs of change are already strong. We believe the stock-market high of 1989 set during the Bubble Economy will come into sight again, should a core CPI of 1.5% or more take hold in Japan and ROE rises into the double digits.”

Investors who focus more globally like Michael Arone, SPDR Chief Investment Strategist at State Street, sees developed international markets broadly and Japan specifically as an appealing alternative to US stocks right now.

Arone highlighted reasons for the bullishness in an interview:

  • MSCI EAFE (Europe, Australia/New Zealand, and Far East) earnings and revenue are growing at a faster clip and beating at a higher rate than in US

  • Dollar will continue to drop as Fed tightening cycle ends, making foreign markets like Japan more attractive to U.S. investors.

Of course, as usual, Warren Buffett was ahead of the game on this play. But if Bank of America is right, it’s not too late for others to join in.

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