A Favorable Breeze in the Japanese Stock Market... Why Are Overseas Investors Flocking to the Japanese Stock Market?

TOPIX Index Hits Highest Level in 33 Years
Record High Profit Forecasts for Listed Companies Due to Yen Depreciation
Stock Buybacks and Buffett's Investment Boost Market Activity

Japanese listed companies are expected to achieve record-high profits last year, driven by an unprecedented depreciation of the yen, leading to a rising trend in the Japanese stock market. Additionally, news of share buybacks aimed at enhancing corporate value and investment news from 'investment guru' Warren Buffett have attracted overseas investors' attention to the Japanese market.

Photo by AP News

At 3:50 p.m. on the 15th, the TOPIX index, composed of major Japanese listed companies, rose 18.46 points (0.88%) from the previous trading day to 2114.85. This is the highest level in 33 years since August 1990.

As investors continued buying, the Nikkei 225 index, centered on large export stocks, also surged. At the same time, the Nikkei 225 index was up 238.04 points (0.81%) from the previous trading day, reaching 29,626.34.

◆ Japanese Listed Companies Forecast Record Profits Due to Yen Depreciation... Stock Prices Rise

The sharp rise in major Japanese indices is due to estimates that major listed companies in Japan will post record-high net profits, supported by the depreciation of the yen.

A man is walking past an electronic board displaying the Nikkei 225 index of Japan. [AP = Yonhap News]

According to SMBC Nikko Securities' forecast of the 2022 fiscal year (April 2022 to March 2023) results for 1,308 listed companies (excluding financial firms) that were part of the Tokyo Stock Exchange First Section before last year's market restructuring, sales are expected to increase by 14.2% from the previous fiscal year to 580.3 trillion yen.

Net profit is projected to slightly exceed the previous fiscal year's record high of 34 trillion yen. Operating profit is estimated to increase by 4.2% to 39.1 trillion yen. Japanese listed companies were able to achieve significant profits by converting foreign currency earnings into yen, as the yen fell to its lowest level in 32 years last year.

In particular, Japanese general trading companies focusing on the energy business saw a substantial increase in net profit, supported by rising international energy prices due to the Russia-Ukraine war. Mitsubishi Corporation and Mitsui & Co.'s net profits for last year are tentatively estimated at 1.1806 trillion yen and 1.1306 trillion yen, respectively, and are expected to exceed 1 trillion yen for the first time.

◆ Warren Buffett "Intends to Invest in Japanese Stocks"... Massive Inflow of Investors

In this situation, Buffett's strong expression of intent to invest in Japanese stocks has revitalized the Japanese stock market. In an interview with the Nihon Keizai Shimbun last month, Buffett revealed that he increased his shareholding ratio in Japan's five major trading companies (Mitsubishi, Mitsui, Itochu, Marubeni, Sumitomo) from the previous 6% range to 7.4%.

Warren Buffett, Chairman of Berkshire Hathaway
[Photo by EPA Yonhap News]

Buffett said that the stocks of the five major Japanese trading companies will constitute a large portion of his portfolio going forward and that he intends to make additional investments in other Japanese stocks.

Following Buffett's positive outlook on the Japanese market, foreign investors have massively entered the Japanese market. According to Bloomberg, overseas traders net purchased $22 billion worth of Japanese stocks and futures last month.

◆ Listed Companies with Low Corporate Value Buy Back Shares... Driving Stock Price Rise

The Tokyo Stock Exchange's demand for listed companies trading below their book value to enhance corporate value has also been a factor in lifting major listed stocks. In response to the securities authorities' request, Mitsubishi Corporation decided to repurchase up to 6% of its own shares for $2.2 billion, and Japan's major technology companies Hitachi and Fujitsu also announced plans for large-scale share buybacks to increase corporate value. Investors began to massively buy shares of companies with undervalued corporate value, expecting additional measures.

Bloomberg reported, "As investors buy shares of listed companies with low valuations and potential for governance improvements, stock prices are rising across sectors from steel manufacturers to airlines."

Japanese Yen and US Dollar
Photo by Yonhap News

Experts predict a favorable wind will continue to blow in the Japanese stock market for the time being. In an investment strategy report, Goldman Sachs strategists Kazunori Tatebe and Bruce Kirk stated, "Japan's economic outlook is expected to be strong due to the Bank of Japan's continued accommodative monetary policy, domestic economic recovery, and robust stimulus measures," adding, "We are focusing on the Japanese market, which has stronger fundamentals compared to overseas stock markets, and expect that expectations for governance improvements will further boost Japanese stock prices."