JAPAN’S Topix index is on course to regain its 34-year high as the equity benchmark finds support from financial stocks that benefit from higher interest rates, and as more companies take steps to improve shareholder returns.
The nation’s broadest equities gauge climbed to as high as 2816.62, above its Mar 22 peak and heading for the highest close since January 1990. That leaves it about 2.5 per cent away from its all-time record set the year before. The Nikkei 225 Stock Average of blue-chip companies reached the milestone earlier this year.
Banks have contributed strongly to the Topix rebound since its trough in mid-April, on expectations the Bank of Japan (BOJ) will raise interest rates, improving their profitability. Insurers have also gained on prospects for tighter BOJ policy, as well as on unwinding of cross-shareholdings. Companies more broadly have also increased dividends and announced share buybacks at a record pace.
“Large-cap value stocks have been relatively strong over the past three months,” said Masahiro Ichikawa, a chief market strategist at Sumitomo Mitsui DS Asset Management. “Expectations for Japanese companies to manage their business in a cost-conscious manner continue to be high.”
The weaker yen has also helped exporters, though recent levels have raised concern the negative impact on import costs and consumer sentiment, and increase the prospect of official intervention to bolster the currency. Inflation expectations have risen to the highest since at least 2004 by one measure, adding to the case for the central bank to raise interest rates.
A measure of banks has climbed about 39 per cent this year, while insurers have risen 60 per cent, outpacing the 19 per cent gain by the Topix index. Fund managers from Fidelity Investments to Janus Henderson expect banks to benefit from the BOJ’s shift, while a Bank of America Asia fund manager survey showed global investors are most overweight the sector in Japan.
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Financial stocks have been particularly strong as the BOJ has been moving towards normalising its policy and the domestic interest rate environment has changed, “leading to earnings expectations such as improved interest margins”, Ichikawa said.
Activists are taking a greater role in pressuring corporate governance reforms, pushing some shares higher. They have made 100 investments in Japanese companies with a market value of around US$318 billion so far, according to data compiled by Bloomberg.
The move has been supported by the Tokyo Stock Exchange’s push to boost Japanese stocks’ appeal, taking steps including listing companies that have voluntarily released plans to improve capital efficiency. The exchange in June said it will widen the universe of stocks that are included in the Topix index while reducing the number of constituents. Analysts expect the reform, will place more emphasis on liquidity, and pressure companies to improve their governance.
“We expect the macroeconomic uncertainties that weighed on stock prices in the first half to diminish and think the corporate fundamentals will lead an uptrend of the market in the second half,” Rie Nishihara, a chief Japan equity strategist at JPMorgan Securities, wrote in a note. BLOOMBERG
