Pharmaceutical stocks in Japan have rebounded to record highs, reflecting investor preference for defensive sectors amid worries about a global economic slowdown. Following a sharp decline in Japanese stocks earlier this month, the Topix pharmaceutical index became the first—and so far only—sector to reach a new peak as of August 22, according to Bloomberg data dating back to 1983. Since the beginning of July, drugmakers have seen a 10% increase, leading the gains among the 33 sectors in the Topix index. In contrast, during the first half of the year, the pharmaceutical sector ranked 18th in performance.
Pharmaceuticals are typically considered defensive stocks, less vulnerable to economic downturns, and this trend extends beyond Japan. In the U.S., healthcare stocks climbed from sixth to third place among the S&P 500’s 11 industry-specific indexes in August. Similarly, healthcare ranked seventh out of 20 industries in the Stoxx Europe 600 Index during the same period.
“The surge in Japanese pharmaceutical stocks reflects concerns over a global economic slowdown, which also triggered the broader market correction,” said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Asset Management.
Unlike many Japan-based companies with a domestic focus, Japanese pharmaceutical firms have the potential for overseas expansion. This positions them as growth stocks with strong valuations and high returns on equity, noted Yasuhiko Hirakawa of Rakuten Investment Management. As semiconductor stocks become increasingly expensive, investors are turning to drugmakers, whose shares have lagged behind other growth sectors despite robust earnings.
Leading the pharmaceutical sector’s gains since July are companies with relatively high market capitalization, including Sumitomo Pharma Co., which has surged 67% through last week. Otsuka Holdings Co. and Chugai Pharmaceutical Co. have also seen significant increases, each rallying by at least 25%. In contrast, the broader Topix index has dropped 4.5% during this period and remains down more than 8% from its July peak.
However, if investor concerns about Japan’s economy and stock market ease, pharmaceutical stocks could face selling pressure as a reaction to their recent rally. While Ishigane does not foresee a U.S. recession as his primary scenario, he expects pharmaceutical stocks to remain popular for at least the next six months.
