Japanese Stocks Surge: Key Moves and Sector Highlights

The Japanese stock market experienced mixed performance during the week ending January 5, as investor sentiment fluctuated due to global economic concerns and domestic policy developments. The Nikkei 225 index closed the week at 28,350, gaining 0.4%, while the broader Topix index saw a modest rise of 0.3%, ending at 2,020.

Early in the week, the market was weighed down by concerns over slower global growth and weaker-than-expected economic data from China. However, mid-week recovery was driven by optimism around corporate earnings and Bank of Japan’s (BoJ) reiteration of its ultra-loose monetary policy stance. Sectoral performances were uneven, with technology and consumer goods leading gains, while financials and industrials underperformed.

Sectoral Highlights

Top Performing Sector: Technology

The technology sector emerged as the week’s best performer, buoyed by strong global demand for semiconductor-related products and services. Major contributors included:

• Tokyo Electron: The stock rose by 6.2% on the back of robust demand projections for its chip manufacturing equipment.
• Advantest Corporation: Shares gained 5.8%, driven by optimistic forecasts for its semiconductor testing systems.
• SoftBank Group: SoftBank gained 4.5%, supported by news of potential divestitures in its Vision Fund portfolio to shore up liquidity.

Worst Performing Sector: Financials

Financial stocks faced headwinds this week, with concerns over narrowing interest margins due to the BoJ’s continued dovish stance. Key decliners included:

• Mitsubishi UFJ Financial Group: Down 2.4% due to profit-taking and concerns over regulatory changes.
• Sumitomo Mitsui Financial Group: Shares fell by 2.1%, reflecting cautious sentiment around future earnings growth.
• Nomura Holdings: Declined 1.8% as weaker trading volumes and subdued deal activity weighed on the outlook.

Key Drivers of Market Performance

1. Bank of Japan’s Policy Stance

The Bank of Japan maintained its ultra-loose monetary policy during its mid-week announcement, reaffirming its commitment to yield curve control (YCC). This decision supported equity markets by ensuring low borrowing costs for businesses but added pressure on financial stocks, which rely on higher interest rates for profitability.

2. Global Economic Developments

Concerns over China’s sluggish manufacturing activity weighed on export-driven sectors early in the week. However, a rebound in US equity markets and better-than-expected US labor market data provided a boost to investor confidence, aiding a recovery in the latter half.

3. Corporate Earnings Outlook

Expectations of strong Q4 earnings among Japanese corporates lent support to the market. Technology firms, in particular, benefited from bullish forecasts tied to sustained global demand for chips and electronic components.

4. Currency Movements

The Japanese yen weakened slightly against the US dollar, trading at ¥133.80. A weaker yen typically benefits export-oriented sectors, as it makes Japanese products more competitive in international markets. This trend supported technology and auto stocks during the week.

Stock-Specific Highlights

Toyota Motor Corporation:

Toyota’s shares rose 2.3% after the company announced plans to accelerate its EV production targets for 2025, aligning with global demand trends. Analysts remain optimistic about Toyota’s ability to expand its footprint in the electric vehicle space.

Sony Group Corporation:

Sony gained 3.7% following the announcement of a strategic partnership to enhance its gaming and entertainment ecosystem. The market reacted positively to the news, reflecting confidence in Sony’s innovation-led growth.

Fast Retailing (Uniqlo):

Fast Retailing climbed 2.9% after reporting stronger-than-expected December sales in both domestic and international markets. Growth was driven by high demand for winter clothing and effective inventory management.

Mitsubishi Heavy Industries:

The stock declined 1.5% as investors grew concerned about potential project delays in its energy and aerospace divisions due to supply chain constraints.

Macroeconomic Indicators

1. Inflation Data:

Japan’s inflation rate for December came in at 3.9%, slightly above the BoJ’s 2% target. While this raised concerns over rising costs for businesses, the central bank’s accommodative stance alleviated immediate fears of a rate hike.

2. Manufacturing PMI:

The Manufacturing Purchasing Managers’ Index (PMI) declined to 48.7, indicating contraction in manufacturing activity. Export demand softened, particularly from China, contributing to this decline.

3. Retail Sales:

Retail sales grew 4.1% year-on-year in December, supported by holiday shopping and robust consumer demand. This provided a tailwind to the consumer goods sector.

4. Industrial Production:

Industrial output contracted by 0.8% in November, marking a slowdown in manufacturing activity. Analysts attribute this decline to supply chain disruptions and weaker export orders, particularly from Europe and China.

Global Context and External Influences

The Japanese market’s performance was influenced by several external factors:

• US Federal Reserve: Signals of a potential slowdown in the pace of rate hikes boosted global equity sentiment, indirectly supporting Japanese stocks.
• China Reopening: China’s gradual reopening after lifting strict COVID-19 restrictions offered optimism for Japan’s export-driven sectors, although immediate benefits remain muted.
• Crude Oil Prices: A slight decline in crude oil prices eased input cost pressures for energy-intensive industries in Japan, such as transportation and manufacturing.
• European Energy Crisis: Continued uncertainty surrounding Europe’s energy crisis created mixed sentiment, affecting Japanese industrial stocks with significant European exposure.

Outlook for the Coming Week

Key Resistance and Support Levels:

• Nikkei 225: Resistance is expected at 28,500, while support lies around 28,000. Breaking above 28,500 could trigger fresh buying interest and push the index towards 29,000. However, if the index falls below 28,000, it could signal further consolidation or mild corrections.
• Topix: Resistance is pegged at 2,050, with support at 2,000. Sustained movement above 2,050 would indicate strength across broader sectors, while a drop below 2,000 may lead to cautious trading.

Sectoral Focus:

1. Technology: Anticipated to maintain momentum amid strong global chip demand. Positive updates from major tech firms and international peers could further bolster the sector.
2. Consumer Goods: Retail-driven gains are likely to continue, supported by robust sales data and seasonally strong consumption trends.
3. Financials: Performance will hinge on macroeconomic updates and any shifts in BoJ’s policy outlook. Recovery in global banking trends could influence sentiment.
4. Industrials: Likely to face pressure from ongoing supply chain challenges, though selective buying in infrastructure-related stocks may provide support.
5. Energy: With crude oil prices stabilizing, energy-related stocks may see moderate gains if global demand improves.

Economic Events to Watch:

1. BoJ Minutes Release: Investors will seek additional insights into the central bank’s policy stance. Clarifications on long-term yield curve control strategies will be pivotal.
2. Trade Balance Data: Scheduled for release next week, offering clues on export recovery trends. Improvements in export numbers could support industrial and manufacturing stocks.
3. Corporate Earnings Reports: Early results from major companies will set the tone for market sentiment. Positive earnings surprises could drive specific stocks and sectors.
4. Global Cues: Developments from the US and China, particularly regarding inflation and trade data, will likely influence Japanese markets.
5. Household Spending Data: A key indicator of domestic economic health, influencing consumer goods and retail stocks.

Summary Table

This comprehensive analysis provides a detailed snapshot of the Japanese stock market’s performance over the week, highlighting sectoral trends, macroeconomic factors, and stock-specific movements. As the new week unfolds, market participants will closely monitor policy developments and global cues to navigate investment strategies effectively.

ALSO READ: China Stock Market: Weekly Winners, Trends & Insights