Japanese stock market outlook positive, say analysts

Investors across the board are still skeptical of the global economy, but the Japanese stock market seems to be shining brightly and could attract many investors in the near future. Analysts on Wall Street are becoming more optimistic about the Japanese stock market as top indices hit a three-decade high.

Despite its current mild depression, the Tokyo Stock Price Index TOPIX (INDEXTOPIX: TOPIX) has been showing a steady growth trend over the past two weeks. During this time, the index has risen to its highest level since 1990, indicating that the market is becoming healthier. Other market performance indicators, including the Nikkei 225 (INDEXNIKKEI: NI225), have also been performing well, with a 20% increase since the year-to-date period.

The renewed vigor in the Japanese stock market is due to two major factors, including a proposed Corporate Governance restructuring for firms being instituted by Topix and progress in the debt ceiling talks by President Joe Biden and House Speaker Kevin McCarthy.

Despite the current outlook of the market, analysts from American multinational investment banking giant, Goldman Sachs Group Inc (NYSE: GS), believe that interest is still low.

“Whereas we believe positioning is stretched among short-term investors such as CTAs (Commodities Trading Advisors), positioning is still light among foreign long-term investors,” strategists Kazunori Tatebe and Bruce Kirk said.

The analysts are particularly hopeful that the corporate restructuring will make Japan an attractive destination for investors who will benefit more from the new rules being rolled out. They said they see a sustained large inflow into the Japanese equity market “in the event that steady progress with structural changes/reforms strengthens the confidence of foreign long-term investors.”

Japanese Stock Market: Future Outlook

The Goldman Sachs analysts believe that the Topix index will reach a high of 2200 points in the short term, a 3% increase from its current level. While the Goldman Sachs call was conservative, BofA strategies see a 7% increase for the index, with a target of 2300 points and an additional 2400 points if its bull case scenario were to play out.

The strategists are particularly optimistic that more share buybacks this year will be recorded and help to push Japanese stocks higher, which will have an effect on the indices as well.

Overall, the analysts agree that the country’s stocks are growing in tandem with core economic and business growth fundamentals, making the current forward surge sustainable.

“Japanese stocks have not risen out of step with fundamentals, and we see further upside as long as earnings continue to improve,” BofA analysts said in a recent research note.

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