Updated February 23rd, 2024 at 12:44 IST

Japanese stocks near record highs, yet remain inexpensive

Over the past year, the Nikkei share average has surged nearly 50 per cent, edging closer to its record high of 38,957.44 points reached in 1989.

Reported by: Business Desk
Nikkei | Image:Shutterstock
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Japanese stocks in focus: Japanese stocks are nearing record levels last seen during the 1989 bubble era, yet valuation metrics indicate they are still not overpriced compared to historical levels and global peers.

Over the past year, the Nikkei share average has surged nearly 50 per cent, edging closer to its record high of 38,957.44 points reached in 1989. 

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Despite this, the MSCI Japan index's 12-month forward price-to-earnings ratio stands at 14.1, lower than the MSCI World index's 17.4 and the MSCI United States index's 20.1.

Miyuki Kashima, head of Japan investments at Fidelity International, noted, “From a historical perspective, Japanese stocks at a forward price-to-earnings ratio of 15 times do not look expensive versus other markets, especially at current interest rate levels.”

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Japanese stocks also boast a low price-to-book value, with MSCI Japan's ratio at 1.37, lower than the 4.72 recorded in 1989 during Japan's asset price bubble.

The recent rally in the Nikkei has been attributed to several factors, including its affordability, corporate governance reforms, and consistent foreign investment. 

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The Tokyo Stock Exchange (TSE) has encouraged companies to adopt better governance practices, resulting in increased shareholder value through initiatives like share buybacks and dividend payouts.

Foreign investors, wary of weak Chinese markets, have been increasingly drawn to Japanese assets. 

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Kashima highlighted the positive impact of TSE's reforms, stating that they will optimise capital allocation and foster wage and investment growth.

Despite reforms, approximately one-third of companies in Japan's Nikkei 225 index still trade below book value, offering attractive opportunities for investors. 

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Moreover, Japan's dividend yield and shareholder yield surpass global benchmarks, making it an appealing investment destination.

Foreign investors injected around 6.3 trillion yen into Japanese equities last year, yet many analysts believe they are still underweight in Japan. 

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Additionally, Japan's domestic households are channeling funds into the stock market through the tax-exempted Nippon Individual Savings Accounts (NISA) programme, further bolstering market participation.

(With Reuters Inputs)

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Published February 23rd, 2024 at 10:06 IST