(Bloomberg) -- This year’s equity rally in Japan has laid the groundwork for more potential gains in 2025, on tailwinds from the gradual normalization of monetary policy and a surge in activist investment.
The country’s benchmark Topix and Nikkei 225 Stock Average both reached all-time highs in 2024 and rose around 15%, despite a widespread rout in August after the Bank of Japan’s second interest rate hike caught the market by surprise.
The BOJ’s decision to raise interest rates above zero for the first time since 2007 in March — and again in July — was a key driver of gains, with insurers leading the Topix’s rise and banks also among the top climbers.
Japanese stocks outperformed the MSCI Asia Pacific Index, beating their South Korean and Indian peers, but lagged the US’s S&P 500.
The BOJ left rates unchanged in its final policy meeting of the year on Thursday, but is expected to hike further in 2025, albeit cautiously. Continued monetary policy normalization and hopes of more wage growth are seen supporting shares next year, as domestic upsides may outweigh worries over US President-elect Donald Trump’s proposed tariffs.
Defensive stocks like paper and utilities lost out on concerns higher borrowing costs will pressure earnings, but support from a historically weak yen softened the blow for exporters.
Japan’s currency reached its lowest against the dollar in more than three decades, supporting carmakers and tech firms. Shares proved less sensitive to yen moves than in recent years, however, as investors’ main focus shifted to the BOJ.
An ongoing boom in shareholder activism — Japan has seen over 140 activist investments in 2024, a record — drove individual stock gains. Firms like Sumitomo Corp., Tokyo Gas Co. and Kobayashi Pharmaceutical Co. climbed after activist funds took stakes, raising expectations they will push for better capital efficiency amid rising pressure from the Tokyo Stock Exchange to boost shareholder value.
“The overall direction is very clear now — there’s an increase in allocation to Japan” among foreign activists, said Chris Smith, who co-manages the Japan Value Fund at London-based Polar Capital. “As companies make changes on corporate governance reform, there’s a lot of money ready to come into the market.”
Here are some sectors that stood out in 2024:
Defense
Defense-related names made up four of the Nikkei’s top 10 performers this year, with IHI Corp., Mitsubishi Heavy Industries Ltd., Japan Steel Works Ltd. and Kawasaki Heavy Industries Ltd. all gaining more than 100%. Worries about geopolitical risks around Japan, heightened by China-Taiwan tensions and political instability on the Korean peninsula, drove investors to the sector, said Yusuke Sakai, a senior trader at T&D Asset Management.
“Defense has become a problem that Japan cannot ignore,” he said. “Naturally, defense stocks are being bought up on this.”
Government promises of tax hikes to fund higher defense spending and Trump’s “America First” security stance will likely propel the sector higher in 2025, Sakai said.
Finance
The BOJ’s overhaul of its negative rates policy boosted shares of banks and insurers, on anticipation their earnings will benefit from higher borrowing costs. The Topix’s measure of insurance companies rose over 56%, with banks up 46%, far outpacing the broader index.
Gains in the insurance sector were amplified by the unwinding of cross shareholdings, after Japan’s Financial Services Agency ramped up its scrutiny of such holdings in a bid for more transparent corporate structures.
Insurers will likely remain strong next year as the unwinding process continues and the impact of rate hikes becomes clear, said Polar Capital’s Smith. “The reduction in cross shareholdings is really supportive to the long-term direction,” he said.
Value Stocks
The Topix’s measure of value stocks rose 19%, compared with a 11% rise for growth shares, as activist investment and the TSE’s ongoing crackdown pushed firms to increase shareholder returns.
“The overall market rally has been driven by value,” said Junichi Takayama, investment director at Nikko Asset Management. “Companies are now more focused on enhancing shareholder value.”
Granted, not all companies have been responsive to corporate reforms, and resistance to change could prove a barrier to future gains, he added.
But value shares are set to extend their climb next year as high-profile M&A moves, like Alimentation Couche-Tard Inc.’s bid for convenience store titan Seven & i Holdings Co., attract more foreign investors, Takayama said.
©2024 Bloomberg L.P.