Japan Topix at highest point since 1990

Japan’s Topix index hit its highest point since August 1990, a sign that foreign investors are back.

The Tokyo price index, also known as the Topix, has risen more than 6% so far this year. The broad-based index, which comprises around 2,000 constituents, has outperformed its regional peers in the Asia-Pacific.

The Topix rose 0.6% on Tuesday and continued to trade higher on Wednesday, led by Utilities, Consumer Bicycling, Technology and Financials. Shares of Tokyo Electron, Oriental Land, Softbank Group, Sony and Nintendo were among the biggest winners on Wednesday morning.

“Foreign investors are back – which says something about the nature of the recovery in the stock market in Japan,” Societe Generale’s Asia equity strategists Frank Benzimra and Tsutomu Saito said in a Tuesday note.

“It’s less [of] a durable trade than a broad recovery based on fundamentals, robust domestic demand and more generous distribution policies (share buybacks accelerating),” he wrote.

The firm noted that foreign investors bought a net 2.1 trillion yen ($15.4 billion) of Japanese stocks in April — adding that Japan’s corporate sector remains the biggest net buyer of Japanese stocks, with volume of 1.1 trillion yen year-to-date this year.

The Nikkei 225 also rose to its highest since November 2021, also led by industrial names including NSK, Mitsubishi Materials and Nippon Sheet Glass. The index topped the psychological level of 30,000 on Wednesday morning.

Earlier this year, shares in Japan’s top five trading houses saw a surge in prices after Berkshire Hathaway Chairman and CEO Warren Buffett increased his holdings in the firms and hinted that he may increase his holdings further.

Monex Group’s Jesper Koll told CNBC that Buffett’s recent trip to Japan to meet with trading companies was considered a “stamp of approval” for investing in Japan.

The Societe Generale strategists added that their overweight position on Japanese stocks remains unchanged.

They expect the central bank to widen the yield curve’s control band to 100 basis points above and below the target for 10-year Japanese government bonds of 0%.

Such a move would “be bullish for the yen but not automatically bearish for equity prices as the yen remains in deeply undervalued territory,” the strategists wrote, adding that the corporate sector would have a competitive edge to the widening YCC band.

The Bank of Japan shocked bond markets in December when it last widened the range from 25 basis points to 50 basis points.

The Japanese yen traded slightly weaker at 136.43 against the dollar on Wednesday.

In Kazuo Ueda’s first meeting as central bank governor, the Bank of Japan made no changes to monetary policy while announcing a review of policy going forward.

SocGen strategists said the BOJ’s change in monetary policy is likely to be a “very gradual process without the elimination of YCC [Yield Curve Control] policy and interest rate increases are expected over the next two years.”

“Remain overweight Japanese equities, unsecured and biased towards banks, financials and equities,” they wrote.

Goldman Sachs said in a May 12 report that the investment bank sees a “many reasons” to support its bullish stance on Japanese stocks.

“Specifically, we note the solid fundamentals compared to stocks in foreign markets, and we also believe that expectations of structural changes/reforms could push Japanese stocks up even more,” wrote Japanese equity strategist Kazunori Tatebe.

Noting that there is a chance for structural reforms ahead, he added: “We believe that the main risks to our bullish view on Japanese stocks are from foreign factors such as the US debt ceiling problem, recession risk and geopolitical risk.”

— CNBC’s Lim Hui Jie contributed to this report.