Investors are banking on robust earnings to sustain gains in Japanese stocks as the year approaches its end, following a tumultuous period that saw the market transition from being a top global performer to the center of a worldwide downturn. While a return to the record high reached in July appears unlikely, the Nikkei 225 Stock Average is projected to rise by 1.3%, reaching approximately 39,844, according to an average forecast from nine analysts surveyed by Bloomberg between September 27 and October 7. Similarly, the broader Topix index is expected to climb by 2.1% to 2,797, as indicated by seven analysts, marking an annual increase of 19% for the Nikkei 225 and 18% for the Topix.
Throughout this year, analysts have consistently upgraded the earnings outlook for the Topix, with forward-looking earnings per share anticipated to reach around 188 points. This increase can be attributed to the yen’s declining strength and the ability of companies to transfer higher input costs to consumers. Notably, net profits among Japan’s 500 largest publicly listed companies hit a record ¥15 trillion ($101 billion) for the quarter ending in June.
“There are various factors that concern investors, but overall sentiment has not been entirely dampened,” stated Daisuke Uchiyama, a senior strategist at Okasan Securities Co. in Tokyo. He believes that the outlook for steady corporate earnings could support a rise in Japanese stocks leading into December.
The primary threat to earnings stems from a potential resurgence of the yen, which has appreciated 12% against the dollar over the past three months as the Bank of Japan edges closer to normalizing its monetary policy. Additionally, the Topix experienced its first quarterly loss in two years for the three months ending September 30.
In the meantime, a resurgence in China’s stock market could divert investor attention from Japan. Following Beijing’s substantial stimulus announcement on September 24, the Shanghai Shenzhen CSI 300 Index surged by 25%, whereas the Topix experienced a mere 0.1% increase.
Alexander Wolf, head of Asia Investment Strategy at JP Morgan Chase Bank NA, stated, “We remain structurally optimistic about Japan as we anticipate nominal growth and rising earnings.” Although he expresses a slightly more favorable view of China due to recent stimulus efforts, he acknowledges that Japanese equities still hold significant upside potential.
Despite some discrepancies across sectors, analysts have predominantly raised their profit outlooks rather than lowered them, according to an earnings revision index from Goldman Sachs. While banks are seeing positive adjustments, certain exporters, such as transport equipment manufacturers, are facing negative revisions.
Concerns regarding the yen’s impact are currently less pressing for exporters, as the interest rate gap between the U.S. and Japan narrows more gradually, according to Ikuo Mitsui, a fund manager at Aizawa Securities Co. He also noted that companies are effectively passing on increased input costs to customers.
“There is a strong likelihood that corporate earnings will exceed market expectations, despite the strong yen,” Mitsui asserted, favoring infrastructure stocks like Hitachi Ltd., which are less vulnerable to economic downturns.
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