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On March 4th, the Nikkei 225 index opened above the 40000 point mark, marking the first time in history, with a daily increase of 0.92%. As of press release, the Nikkei 225 index has risen 0.8% to temporarily close at 40228.99 points.
On the news front, over the weekend, a big news came - the Japanese government is considering announcing a formal end to deflation. Previously, the Japanese economy had been struggling with deflation for over 20 years. Currently, what investors are most concerned about is that once Japan announces overcoming deflation, the timing of interest rate hikes will become the focus, and this will be the first rate hike by the Bank of Japan since 2007. The shift in monetary policy will have a significant impact on the currently hot Japanese stock market.
In fact, the performance of the Japanese stock market in 2023 has been outstanding, with the Nikkei 225 index rising 28.24% for the whole year, second only to the Nasdaq's 43.42% among major global stock indices. At the same time, the Bank of Japan continues to signal that it will consider withdrawing from the negative interest rate policy implemented since 2007 and initiating the normalization of monetary policy.
Can the "long bull" in the Japanese stock market continue?
According to the Daily Economic News on February 29th, Jesper Koll, an economist and advisor at investment fund Japan Catalyst Fund, said in analyzing the rise of Japanese stocks that I believe there are several factors. Firstly, Japanese stocks are still very cheap, so value investors are very fond of Japan. Secondly, corporate profits are growing, and mergers and investments are also growing. Therefore, in addition to value investors, growth stock investors have also joined this party. International investors in the Middle East or Europe consider Japan as a good investment destination. He also believes that it is a very reasonable prediction that the Nikkei 225 index will climb to 55000 points by the end of 2025.
He said that the normalization of monetary policy will have a positive effect on the Japanese stock market. This is not the beginning of tightening the financial environment and a new round of interest rate hikes, it is just the normalization of monetary policy, targeting short-term interest rates. It needs to be recognized that the rise of short-term interest rates and the decline of treasury bond yields are very positive for Japanese insurance companies and banks.
Japan is considering announcing the official end of deflation
According to Securities Times on March 4th, citing Kyodo News, insiders revealed that the Japanese government is discussing officially announcing that the economy has overcome deflation, marking a significant shift after nearly 20 years of fighting against falling prices. About 20 years ago, the Japanese government acknowledged that prices were moderately declining, indicating that the economy was experiencing deflation.
The recent prospects of inflation and sustained wage growth have brought hope for escaping deflation. Japan's inflation rate in January exceeded expectations, with the consumer price index excluding fresh food rising by 2% year-on-year. This is the 22nd consecutive month that the inflation rate has reached or exceeded the Bank of Japan's target. The country's labor market remained tight that month, leading companies to promise significant salary increases in annual salary negotiations with unions. The Japanese government will consider the Consumer Price Index and other major economic data when making decisions.
According to insiders, the Japanese government will carefully study the results of this year's spring labor negotiations (also known as the "spring struggle") and inflation prospects to determine whether Japan has the conditions to declare a complete escape from deflation. It is worth noting that although this formal statement is only symbolic, it will mean that a major growth bottleneck for the Japanese economy has been eliminated.
The report indicates that Japanese Prime Minister Fumio Kishida and cabinet members may publicly announce this change in the government's monthly economic report. For a long time, the Japanese economy has been in a cycle of price declines suppressing corporate profits, hindering wage growth, and leading to stagnation in private consumption. Efforts to combat deflation have been ongoing for many years, and the Bank of Japan's measures, including a 2% inflation target, have formed a potential milestone. The unprecedented monetary easing measures implemented by the Bank of Japan in the past decade are aimed at freeing Japan from deflation, in line with a joint agreement reached with the Japanese government in 2013, which includes a commitment to target a 2% inflation rate.
Currently, what the market is most concerned about is that once Japan announces overcoming deflation, the next time the Bank of Japan will raise interest rates will become the focus, and this will be its first rate hike since 2007.
On February 29th, Bank of Japan's reviewing committee member Takada Chuang stated at a press conference that the goal of stabilizing inflation at 2% with wage increases has finally reached a stage of hope. Afterwards, the market generally believed that lifting the negative interest rate policy, which is an adjustment to the large-scale monetary easing policy, is not far away.
The expectation of interest rate hikes by the Bank of Japan once stirred up the capital market. However, Bank of Japan Governor Kazuo Ueda stated on February 29th that the expected sustained and stable achievement of inflation targets has not yet been achieved. He also expressed the idea of paying attention to the spring labor management negotiations (Spring Dou) in order to see the trend of wages clearly. Regarding the above statement by the Governor of the Bank of Japan, some market insiders have interpreted that the Bank of Japan may postpone the timing of interest rate hikes from March to April.
The main indicators of Japanese stocks are still lower than those of other markets
According to the Daily Economic News on February 28th, Reuters reported that the current valuation of the Japanese stock market is still relatively low. According to popular P/E ratios, the forward P/E ratio of the MSCI Japan Index for the next 12 months is only 14.1, lower than the MSCI Global Index's 17.4 and the MSCI US Index's 20.1. In addition, the price to book ratio of the MSCI Japan Index is only 1.37, far lower than 4.72 before the bursting of the foam economy.
The forward P/E ratio of the MSCI Japan Index is still relatively low. Reuters

In addition, data from LSEG (London Stock Exchange) shows that about 33% of companies in the Nikkei 225 index are still trading below book value, while the proportion of companies in the S&P 500 index is only 3%.
"From a historical perspective, the forward P/E ratio of Japanese stocks is 15 times, which is not expensive compared to other markets, especially at current interest rates. More importantly, the P/B ratio of Japanese stocks is relatively low, which means they are undervalued compared to the asset value on the company's balance sheet," said Miyuki Kashima, head of investment at Fidelity International Japan
Reuters

Against the backdrop of the continuous depreciation of the Japanese yen, foreign investment has also continued to pour into the Japanese stock market. According to Bloomberg, from the beginning of this year to February 22, these funds accounted for approximately two-thirds of the trading volume on the Tokyo Stock Exchange. In January alone, foreign investors bought a net $13.8 billion worth of Japanese stocks, the seventh largest monthly purchase since records began in 1982.
Among them, the most attractive one is the "stock god" Buffett's favor for Japanese stocks. He established positions in stocks of five major Japanese companies in 2020 (including Itochu Corporation, Marubeni Corporation, Mitsubishi Corporation, Mitsui Corporation, and Sumitomo Corporation) and further increased his holdings in 2023. In a recent shareholder letter, Buffett revealed that diversified business, high dividends, high free cash flow, and prudent issuance of new shares are important reasons for his preference for these five major trading companies. He also stated that Berkshire will continue to increase its investment in these five companies.
For the future outlook of Japanese stocks, CICC pointed out in a report that there is a possibility for the Nikkei Index to break through the integer level of 40000 points within 2024. However, CICC also reminded in its report that it is still necessary to pay attention to the risk of Japanese stock market correction in the short term. The institution stated that the Japanese economy is susceptible to external influences. Over the past half century, every time the United States has fallen into a recession, the Japanese economy has also fallen into a recession. If the US economy falls into a recession in the future, it is highly likely that the Japanese economy will also be "brought into" a recession.
As part of Abenomics, the Bank of Japan's loose policy has been ongoing for many years, setting the tone for the rise of the Japanese stock market. Changes in monetary policy may bring certain changes to the stock market.
Jeffrey Young, former head of forex strategy at Citigroup and co-founder and CEO of DeepMacro, has just finished his several week inspection of Japan. In an interview with the Daily Economic News, he pointed out that "the market currently expects the Bank of Japan to end its negative interest rate policy on April 26 or June 14. Due to factors such as Japan's inflation having fallen and the Bank of Japan's cautious remarks, we expect interest rates in Japan to rise to 0% in June, and possibly even in July."
The International Monetary Fund (IMF) has pointed out that once the negative interest rate policy ends, the Bank of Japan may gradually raise interest rates and tighten monetary policy, which may lead to a decrease in domestic liquidity, an increase in borrowing costs, a slowdown in economic growth, and reduced inflationary pressure in Japan. These factors may weaken the profit expectations and valuation levels of the Japanese stock market, trigger investor risk aversion, and lead to adjustments and fluctuations in the stock market.
Daily Economic News Comprehensive Securities Times, Daily Economic News (Reporter: Li Menglin, Cai Ding)
Disclaimer: The content and data in this article are for reference only and do not constitute investment advice. Please verify before use. Based on this operation, the risk is borne by oneself.
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