Japan’s stock market experienced significant gains in 2024, with both the Topix and Nikkei 225 Stock Average reaching record highs. This positive momentum is expected to continue into 2025, driven by factors such as monetary policy normalization and a surge in activist investment.
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The Bank of Japan’s (BOJ) decision to raise interest rates twice in 2024, for the first time since 2007, played a crucial role in the market’s ascent. Insurers and banks were among the top performers, benefiting directly from the higher interest rate environment. While the BOJ maintained its rates at the final meeting of 2024, further cautious hikes are anticipated in 2025. This continued normalization, coupled with expectations of wage growth, is projected to bolster Japanese equities, potentially offsetting concerns surrounding proposed tariffs by US President-elect Donald Trump.
Despite a global market downturn in August following the BOJ’s second rate hike, Japanese stocks outperformed the MSCI Asia Pacific Index, surpassing South Korean and Indian counterparts. However, they lagged behind the US S&P 500. A historically weak yen provided support for exporters, mitigating the negative impact of higher borrowing costs on defensive sectors like paper and utilities. The yen’s depreciation to a three-decade low against the dollar further bolstered carmakers and tech firms. Notably, the market’s sensitivity to yen fluctuations decreased as investor focus shifted towards the BOJ’s policy decisions.
Activist investor engagement reached unprecedented levels in 2024, with over 140 investments recorded. This surge contributed to individual stock gains, as activist funds pushed for improved capital efficiency and shareholder value. Companies like Sumitomo Corp., Tokyo Gas Co., and Kobayashi Pharmaceutical Co. experienced significant price appreciation following activist involvement. This trend is expected to persist, attracting further investment into the Japanese market.
Key Sector Performance in 2024
Several sectors demonstrated exceptional performance in 2024, setting the stage for potential continued growth in 2025.
Defense Sector Soars Amid Geopolitical Concerns
Defense-related companies dominated the Nikkei’s top performers, with IHI Corp., Mitsubishi Heavy Industries Ltd., Japan Steel Works Ltd., and Kawasaki Heavy Industries Ltd. all experiencing gains exceeding 100%. Heightened geopolitical tensions, particularly concerning China-Taiwan relations and instability on the Korean peninsula, fueled investor interest in the sector. Government commitments to increased defense spending and Trump’s “America First” security policy are likely to further propel the sector’s growth in 2025.
Financial Sector Boosted by Rate Hikes and Regulatory Changes
The BOJ’s policy shift significantly benefited banks and insurers, as higher borrowing costs promised improved earnings. The Topix’s insurance sector index surged over 56%, while banks climbed 46%, significantly outpacing the broader market. The unwinding of cross-shareholdings, driven by increased regulatory scrutiny from the Financial Services Agency, further amplified gains in the insurance sector. This trend is anticipated to continue in 2025 as the effects of rate hikes materialize and corporate structures become more transparent.
Value Stocks Outperform Growth Stocks
Value stocks outshone growth stocks in 2024, with the Topix value index rising 19% compared to an 11% increase for growth shares. This performance was attributed to activist investment and regulatory pressure on companies to enhance shareholder returns. While some companies have resisted corporate reforms, high-profile M&A activity, such as Alimentation Couche-Tard Inc.’s bid for Seven & i Holdings Co., is expected to attract foreign investment and further support value stock performance in 2025.
Conclusion: Positive Outlook for Japanese Equities in 2025
The strong performance of the Japanese equity market in 2024, fueled by monetary policy changes, activist investment, and sector-specific drivers, lays a solid foundation for continued growth in 2025. While challenges remain, the overall outlook for Japanese equities appears positive.
