TOKYO
Japanese stocks wrapped up 2023 with historic gains thanks in large part to three drivers: the Tokyo Stock Exchange’s push for reform at undervalued companies, Warren Buffett’s trip to Japan, and a rise in acquisitions.
The Nikkei Stock Average ended the final trading day of the year at 33,464 on Friday, up 28% on the year for the biggest rise since the record-setting year of 1989.
The last weeks of 2023 saw a flurry of disclosures by companies with largely identical titles — “Action to Implement Management that is Conscious of Cost of Capital and Stock Price” — ahead of the TSE’s release in January of a list of these plans. About 40 came out in December alone.
This is part of an effort kicked off by the bourse in March to push companies, particularly those with price-to-book ratios of less than 1, to take steps to improve their valuations.
Investors are looking for another case like that of Takachiho Koheki. Under pressure to meet the listing criteria under the TSE’s April 2022 reorganization, the electronics company set a goal of returning all its profits to shareholders until it achieves an average return on equity of 8% across three fiscal years. Its shares ended 2023 in record territory.
The number of companies announcing buybacks rose in 2023 to 992, according to QUICK data.
A visit by Warren Buffett to Japan in April, during which he expressed interest in buying more Japanese stock, also played an important role.
Afterward, “foreign investors started paying more attention to Japanese stocks, and taking an interest in the TSE’s reforms and changes at Japanese companies,” said Takeo Kamai, head of execution services at CLSA Securities Japan.
Net buying of Japanese stocks by foreign players is on track to exceed 3 trillion yen in 2023 — the highest figure since the early days of Abenomics in 2013.
Investors have become more confident in the Japanese economy’s growth prospects through dialogue with business leaders at Japanese companies, according to Pictet Asset Management’s Shaniel Ramjee, who notes a particular increase in purchasing of bank stocks.
Meanwhile, the success of companies making skillful use of overseas acquisitions to grow is starting to shake the long-standing image among North American investors of Japanese stocks as low-growth.
Zensho Holdings became the first Japanese restaurant company with a market capitalization above 1 trillion yen ($7.1 billion) after a string of acquisitions including an operator of takeout sushi chains in Europe and the U.S.
Tokyo Gas announced in mid-December that it would acquire American gas producer Rockcliff Energy II for about $2.7 billion and has just completed the purchase. Nippon Steel announced plans last week to buy U.S. Steel for around 2 trillion yen.
The fact that companies are making such acquisitions despite the yen’s weakness making them more costly in Japanese-currency terms points to a shift in mindset among Japanese corporate management.
Traders are also encouraged by signs of domestic reorganization.
Motor maker Nidec in November bought Takisawa Machine Tool via a tender offer that was, unusually, launched without the consent of Takisawa’s management, with Nidec pointing to the target’s low price-to-book ratio. Moves like this and the tug of war between Dai-ichi Life Holdings and medical information site operator M3 over Benefit One suggest that the taboo against domestic acquisitions is fading.
The yen’s recent appreciation poses a potential risk to the rally continuing into the new year. The currency touched a five-month high against the dollar at one point Thursday. The U.S. Federal Reserve is expected to start cutting interest rates soon, while many see the Bank of Japan ending its negative-rates policy, narrowing the spread that had contributed to the yen’s earlier drop.
Mizuho Securities estimates that profit growth will continue at major Japanese companies in fiscal 2024 as long as the yen does not strengthen beyond 130 to the dollar.
But if it does appreciate, reduced expectations of exporters beating their earnings forecasts would likely weigh on stocks, though there are hopes that catalysts like corporate reform would keep the market resilient even in this scenario.
