Japanese stocks advanced again on Wednesday, the 1.5% gain in the Nikkei 225 meaning that Dow-like index has now doubled from its pandemic lows.
The broad-market Topix added 1.3% in Tokyo. It is up a heady 22.8% in 2023, while there's no doubt about the star performer so far this year, with the Nikkei 225 up 30.3% year-to-date.
Like most markets, Japan had a massive dip in March 2020 as the global effect of the pandemic became a reality. Since its March 19, 2020, close, the Nikkei is now up 102.4%, while the Topix has gained 81.9% since its low close on March 13 that year.
I'll dissect the difference between the two indexes for a second. The Tokyo Price Index in its full name, the Topix tracks all the companies in the "first section" of the Tokyo Stock Exchange, basically all the major listings in Japan. Think the S&P 500.
The Nikkei 225 is "Dow-like," as I often describe it, because it tracks 225 blue-chip companies. Sure, 225 is a far larger number than the 30 stocks in the Dow. But the Nikkei 225 is price-weighted, like the Dow, thus giving greater weight to the very biggest Japanese companies. I pay more attention to the Topix, which is market-cap weighted, as an indication of how the Japanese market in general is doing.
Both are faring extremely well, with the Nikkei's outperformance explained by inflows from international investors, who tend to target the biggest, best-known stocks. Consider that Warren Buffett has done his Tokyo share shopping purely from one well-stocked shelf, buying the Japanese trading houses or sogo shosha.
I wrote more about that in April, when Buffett visited Tokyo for the first time in a decade. His Berkshire Hathaway (BRK.A) (BRK.B) holding company has taken a hefty chunk of only five Japanese stocks: Itochu T:8001 and (ITOCY) , Marubeni T:8002 and (MARUY) , Mitsubishi T:8058 and (MTSUY) , Mitsui T:8301 and (MITSY) , and Sumitomo T:8053 and (SSUMY) .
That bet has paid off in spades. Year-to-date, Marubeni has leapt 60.5%, while Mitsubishi almost matches that with a 59.6% advance. Mitsui is up 43.8%, Sumitomo has moved ahead 40.1%, and Itochu is up 39.3%.
These are enormous conglomerates with arms in many industries, initially set up to source raw materials from abroad and trade in commodities such as textiles, steel and chemicals. They then also marketed Japanese exports abroad as trade kicked into high gear in the 1950s and 1960s. They also offered financing, mainly to affiliated group companies, as well as logistics and transportation. Now they are widely diversified and arguably the flagbearers of big industry in Japan, or "Japan Inc."
But other major Japanese companies outside those trading houses are also doing well. Toyota Motor T:7203 and (TM) is today's top performer in the Nikkei 225, up 6.3%. Investors are excited about its plans to start making next-gen lithium-ion batteries from 2026 to power electric vehicles, something it has so far resisted in favor of producing hybrids. Toyota's rally has been recent, the bulk of any gains in 2023 coming in the last three weeks, with Toyota up 19.6% since May 23.
Softbank Group (SFTBY) is up 12.0% this week with a 4.8% gain today, as it prepares to launch its initial public offering of the British semiconductor designer Arm on Nasdaq later this year. Intel (INTC) is reportedly considering becoming an anchor investor in the offering.
Japanese stocks have crested to their highest levels since the end of the asset bubble in 1990. The yen has weakened 6.7% this year against the U.S. dollar, which gooses the overseas profits of major Japanese companies when they repatriate earnings. But investors are also encouraged that the U.S. dollar has ceased its rapid rise, with the U.S. Federal Reserve apparently about to pause on interest rates, removing some of the pressure that has built on the central Bank of Japan to stem any destabilizing rapid moves in the currency.
Steady as she goes. If the Fed does take a rest, the Bank of Japan will have further encouragement to maintain its era of easy money. It would like to see persistent wage gains and a sustained inflation rate of 2%.
We shouldn't ignore the impact of reallocation of Asia-designated money among global funds and major institutions. China is out of favor among global investors, and is increasingly inaccessible for U.S. stockholders. Fund managers have to monitor which among the major Chinese listings have sanctions against them that would prevent U.S. investors from holding those stocks.
Demand for "Asia ex-China" funds is rising, according to an interesting piece in the Financial Times yesterday, with geopolitical concerns driving some requests for "Asian allies" investments that are U.S.-friendly. Mainland Chinese investors, meanwhile, are expressing great interest in international exposure.
For Western investors concerned about Chinese stocks, whether because of politics or the economy, it's far easier to allocate that cash to "safe" Japan. It strikes me as a strange move since Japan is such a developed market, while China is still very much emerging, so the nature of the investments in each place is quite different. But Japanese holdings are typically steady, a secure place to put Asian allocations. This year's outperformance is a break from the norm when you might expect the Tokyo market to advance maybe 10% or so in a solid year.
The numbers in China show that the post-Covid recovery has lost its way. The central People's Bank of China surprised markets on Tuesday by lowering the short-term seven-day reverse purchase rate by 10 basis points, setting the stage for a potential easing of the medium-term lending rate by perhaps 10 basis points on Thursday, as well as the long-term lending rate on June 20.
The Chinese central bank has insight into numbers that haven't yet been released for May credit and activity data, so those are likely to be weak. We already know that property sales and prices are showing sharper declines, exports have shrunk more than expected, and demand looks wan.
To Nomura's China economics team, it suggests that Beijing is getting concerned, and likely to roll out more stimulus: "The risk of an economic double-dip is on the rise, in our view, and we believe Beijing still has to do more over the rest of this year."
But rates alone aren't the answer. Stemming the downward cycle in the property sector will be a focus, not least because selling land to developers is a primary way that local governments raise money.
"It's not enough," Ting Lu, chief China economist at Nomura, says of the likely rate cut on Thursday. "The real reason for the weak growth now is not about high interest rates. It's more about confidence about the future."