Japanese Stocks: Short-Term Instability but Long-Term Bullish Outlook

Japanese stocks are anticipated to experience instability over the next month, although a bullish long-term outlook is expected, according to a note from Citi, which highlighted strong earnings and improving economic conditions.

Citi pointed out that investor skepticism towards Japanese markets persists amid uncertainties surrounding both Japanese monetary policy and the U.S. economic outlook. However, they noted improved fundamentals on both micro and macro levels. Japanese earnings demonstrated growth during the April-June quarter despite fluctuations in foreign exchange markets, particularly concerning the yen.

The yen is not expected to appreciate as strongly as initially anticipated, which could positively impact local earnings. The resilience in earnings increases the chance of Japanese companies enhancing their outlook during the interim results release scheduled for October. Additionally, indications of improved personal consumption bolster domestic demand.

Citi observed a rising trend in Japanese companies announcing or increasing share buybacks, indicating management’s growing focus on the stock market, a positive sign for investors.

Despite a significant drop in early August that saw the Nikkei 225 and TOPIX enter a bear market due to concerns over interest rate hikes by the Bank of Japan, these indexes managed to recover most losses by late August. Nonetheless, further gains are dampened by continued caution towards the country, especially as the BOJ maintained its hawkish stance.

Citi analysts stated, “We think maintenance of a bullish stance on Japan equities is appropriate on a view of around six to twelve months even if instability persists in the near term.” They emphasized that the possibility of near-term guidance hikes and sizable share buybacks present value opportunities in Japanese markets.