Tokyo stocks are expected to test an all-time high in 2024 on hopes of robust corporate results and real wage growth, overcoming a stronger yen that will pressure exporters amid prospects of policy changes by the Japanese and U.S. central banks.
Also lifted by investor-friendly moves by companies, the benchmark 225-issue Nikkei Stock Average is likely to rise to between 36,000 and 40,000, experts said, with its upside possibly clearing the 38,916 peak marked in late 1989 during the asset price bubble.
After declining in 2022, the Nikkei advanced around 28 percent, its fastest pace in a decade, to end 2023 at 33,464.17, its highest finish since 1989. The increase was helped by the boost provided from export-oriented firms which saw higher profits due to the yen's depreciation against the U.S. dollar.
But in 2024, the yen is expected to rise, with the U.S. Federal Reserve set to cut its key interest rate while the Bank of Japan is projected to end its negative interest rate policy. A stronger yen would initially pose a challenge for stocks, likely weighing on major auto and electronics companies, analysts said.
Economic indicators suggest inflation is cooling in the United States, and the Fed has signaled it could embark on three rate cuts in 2024, while markets forecast as many as six, projecting reductions could begin as soon as March.
"It's unlikely the Fed will trim rates as soon as participants hope, but the anticipation will probably weigh on the dollar through the year's first half to strengthen the yen," said Takuya Kanda, senior researcher at the Gaitame.com Research Institute.
The yen, trading at around 141 against the dollar in late 2023, could appreciate to 130, far beyond the average of 139.35 for fiscal 2023 that Japanese firms predicted in the BOJ's quarterly Tankan business sentiment survey released in December.
Some analysts say the Nikkei could retreat to as low as 30,000 during the first six months of the year under the impact of a stronger yen.
Shingo Ide, chief equity strategist at the NLI Research Institute, said the yen could appreciate even more depending on the state of the U.S. economy, noting that the "risk that the U.S. economy could enter a recession has not faded."
"If the U.S. economy cools more than expected, the dollar could briefly plunge to the 120 yen zone in the first half of 2024," he said.
Nevertheless, many experts believe shares will absorb the negative impact of a stronger yen and continue chasing higher ground in 2024, with corporate earnings as a whole expected to improve further.
"Looking back, Japanese firms have been very successful in improving profit margins through passing on costs and rearranging portfolios such as by cutting non-growth parts of their businesses to make them more investor-friendly," said Maki Sawada, a strategist in the Investment Content Department of Nomura Securities Co.
"We expect the record-breaking trend of high corporate profits to continue into 2024 and 2025. The Nikkei average is likely to keep rising, backed by the solidity of Japanese firms," she said.
Listed companies are expected to post 8 percent growth in net profit in fiscal 2024 from the previous year, according to estimates by Nomura Securities, led by gains in semiconductor-related electronics, as supply shortages continue to ease and demand soars for artificial intelligence technology.
Whether Japan can finally realize wage growth that outpaces inflation will also be key for Tokyo stocks to reach projected highs, analysts say.
In October, Japan's real wages fell 2.3 percent from a year earlier for the 19th consecutive monthly decline, despite the average pay hike at major member firms in 2023 standing at 3.99 percent, the highest in 31 years.
Masahiro Yamaguchi, head of investment research at SMBC Trust Bank, says companies are believed to be positive about raising wages against a background of inflation supporting their earnings.
The Cabinet Office projects per-capita income growth will be 3.8 percent in fiscal 2024, outpacing 2.5 percent inflation, according to its estimate released on Dec. 21.
"This time, pay rises are likely to be higher and inflation is slowing, which could bring about that virtuous cycle between prices and wages that will lift stocks," Yamaguchi said.
The market is likely to be further bolstered by efforts to promote investment and corporate reforms by the government and Tokyo Stock Exchange owner Japan Exchange Group Inc., including encouraging stock buybacks and raising dividends.
One such measure is the bourse's plan to publish from 2024 a list of companies making their businesses more attractive to outside investors.
"Companies not on the list are going to be seen as unwilling or not capable of improving, likely affecting their stock prices," said the NLI Research Institute's Ide.
In the Chinese zodiac, 2024 is the Year of the Dragon, which a Japanese stock market proverb says promises growth as it soars heavenward.
It has seen sharp fluctuations before, from 1988's huge gains during the asset price bubble to 2000's dot-com crash. Participants will hope this dragon soars sustainably.