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Nikkei reaches record high on reforms and strong corporate earnings in Japan.

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The Nikkei and Topix have emerged as standout outperformers in the Asia Pacific in 2024, with gains of more than 10% so far this year, following a surge of more than 25% in 2023. Japan Inc’s strong third-quarter corporate earnings have prompted Bank of America equity strategists to upgrade their 2024 year-end forecasts for the Nikkei 225, raising it to 41,000 from 38,500. The rally has been supported by a weaker yen, which has fallen about 6% against the dollar and appears to be on track to drop to 33-year lows. Investors have been pouring funds into Japanese equities, taking cues from Warren Buffet’s bullish calls on Japan and cheering the Japanese government’s push towards greater corporate governance reforms.

According to Nikkei, net profits of listed companies in Japan for the fiscal year ending March 2024 could reach a record high for the third consecutive year. This follows record quarterly earnings for the October-December period, which increased 45% from the same period a year earlier and are 14% higher than consensus estimates, according to Goldman Sachs analysts. Market participants expect the Bank of Japan to move away from its negative rates regime at its April policy meeting, once the annual spring wage negotiations confirm a trend of meaningful wage increases. Despite the weakening yen boosting some of Japan’s exporters, it has lessened the purchasing power of consumers in the country, leading to reduced domestic consumption and a decline in Japan’s GDP.

The recent gains in the stock markets have come alongside the yen’s weakening, driven largely by the divergence between high U.S. interest rates and Japan’s ultra easy policy. Japanese Finance Minister Shunichi Suzuki articulated his concern on the weakening yen on Friday, stating that he was watching the currency’s moves with a sense of “urgency.” The central bank believes that wage increments would translate into a more meaningful spiral, encouraging consumers to spend. However, prolonged high inflation rates have negatively impacted domestic consumption, resulting in Japan’s GDP contracting for a second consecutive quarter and losing its place as the world’s third-largest economy.

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