Daishin: "TOPIX Nears 2,800...Reduce Exposure as It Approaches Key Level"

An analysis has suggested that as the TOPIX index in Japan approaches the 2,800 level, investors should consider reducing their exposure. This view is based on confirmed weak earnings among manufacturers listed on the Tokyo Stock Exchange, as well as concerns that the Bank of Japan (BOJ) selling stocks and exchange-traded funds (ETFs), and U.S.-imposed auto tariffs, could hinder further gains in the Japanese stock market.

Moon Namjoong, a researcher at Daishin Securities, stated in a report titled "Japan: Examining Three Issues ? Earnings, BOJ Sales, Auto Tariffs" on May 12, "With the appreciation of the yen likely to be somewhat limited, it is important to examine three key domestic issues to assess the potential for further gains in the stock market." The TOPIX index, a market capitalization-weighted index covering all common stocks listed on the First Section of the Tokyo Stock Exchange, is currently approaching the 2,800 level, reflecting optimism over successful tariff negotiations between the United States and Japan.

As the first factor investors should watch, Moon highlighted the "earnings of Japanese manufacturing companies listed on the Tokyo Stock Exchange for the previous fiscal year (April 2024?March 2025)," noting that "the net profit of about 500 listed manufacturers declined by 2% year-on-year." He pointed out that the weakness was particularly pronounced in the automotive and steel sectors.

The second factor he mentioned was the BOJ's sale of stocks and ETFs. He explained, "Since April 2016, the BOJ has been pursuing an exit strategy by selling its stock holdings, and the balance, which once stood at 1.3 trillion yen, had declined to about 24 billion yen as of the end of April this year." He projected, "All sales will likely be completed by July this year." He added, "Once the stock sales are completed, the next step will be to sell the ETFs acquired since 2010," noting that "as of the end of April this year, the ETF balance stood at 70 trillion yen at market value (37 trillion yen book value)." Such actions by the BOJ are bound to have an impact on the stock market.

Finally, regarding U.S.-imposed auto tariffs, Moon pointed out, "The U.S. government has decided to lower the tariff on British-made cars from 25% to 10% for up to 100,000 vehicles per year." However, he cautioned, "Unlike the UK, Japan exports about 1.37 million vehicles annually, so if a cap is set on Japanese exports, the impact could be significant." He further explained that even the UK, which recorded a trade deficit of $11.9 billion with the U.S. last year, failed to secure exemptions from auto and reciprocal tariffs in recent negotiations. This, he argued, could pose a major burden for Japan, which has consistently posted a trade surplus with the U.S.

Moon concluded, "Taking these three factors into account, I believe they will act as obstacles to both yen appreciation and the TOPIX index settling above the 2,800 level," adding, "As the index approaches 2,800, it would be prudent to reduce exposure."