The Tokyo Stock Exchange is hammering out a solid year with the benchmark Nikkei 225 index trading near 33-year highs. The country's recent market restructuring efforts and attempts to entice foreign investment appear to be paying off. Prominent U.S. investor Warren Buffett increased his stakes in various Japanese companies earlier this year.
Japan's GDP grew at a 2.7% annual clip in the first quarter of 2023, showing much faster economic growth than preliminary estimates of a 1.6% increase, according to revised government data released last Thursday. Economists projected 1.9% growth for the quarter. Japan's GDP stagnated throughout the 2000s after the asset price bubble burst in the 1990s. And there are more challenges in the years ahead as the country's aging population strains its labor force.
The Nikkei climbed three sessions in a row through Tuesday, closing above 33,000 for the first time since July 1990. The Nikkei is composed of 225 of the top stocks trading on the TSE. The top companies by weight include Fast Retailing, Tokyo Electron, Advantest, SoftBank and Daikin Industries.
Morgan Stanley named Japan the most promising stock market in Asia in a June 4 report. In late May, the firm noted that return on equity (ROE) for listed equities has more than-doubled in the last 10 years and was set to reach 11% to 12% by 2025.
The yen has weakened vs. the U.S. dollar, starting the year at $0.0076 per yen, dwindling to $0.0072 as of Tuesday. That is a plus for Japan's massive export trades. However, that means that Nikkei returns are not quite as good for U.S. investors.
Warren Buffett's Japan Bet
Still, that hasn't stopped waves of foreign investment from flowing into the country, including the likes of Warren Buffett. The Oracle of Omaha owns more stocks in Japan than any other country outside the U.S., he said in April.
Buffett also boosted his stake in Japan's top five trading houses to 7.4%, which includes Mitsubishi, Mitsui, Sumitomo, Itochu and Marubeni, the Wall Street Journal reported April 12.
Buffett began channeling capital into Japan-based investments in 2020. He told CNBC in mid-April that "their results exceeded our expectations." He plans to hold the stocks for 10 to 20 years.
Market Reform
Meanwhile, Japanese regulators instituted new policies to increase transparency and help spur foreign investments in the country. TSE operator the Japan Exchange Group finalized its market rules for a restructuring in April last year. The initiative required listed companies to "comply or explain" if they are trading below a price-to-book ratio of one, which may be an indicator of using capital inefficiently, CNBC reported.
The price-to-book value is the ratio of the total market value of a company's share price over its book value, or net assets.
Regulators will require these companies to show plans for improving capital efficiency. Some rules require they publish public disclosures in English and demonstrate how they have engaged investors as the court foreign support.
The TSE warned uncompliant companies could face delisting as early as 2026.
Japan Stocks
Toyota, which trades as American depositary receipts (ADR) in the U.S., jumped 5.7% Tuesday on plans for new batteries and electric vehicle innovation. The stock is up 15.7% for the year and is not listed among the Nikkei 225's top-10 weighted issues.
Fast Retailing's ADRs rose 2.9% in early trading Tuesday. Its ADRs are up almost 27% this year.
SoftBank ADRs swung 2% higher Tuesday morning, giving it an 7.3% YTD gain.
Among U.S. ETFs tracking TSE and Nikkei 225 stocks, the iShares MSCI Japan ETF tracked 1.4% higher Tuesday and shows a year-to-date gain of 16.8%. The WisdomTree Japan Hedged Equity Fund also showed a 2.2% jump early Tuesday, with a 28.3% advance this year.
The Nikkei advanced 1.8% Tuesday and is up nearly 27% so far this year. The Nasdaq composite had advanced nearly 30% for the year through Tuesday, while the S&P 500 was up 13.8% and the Dow industrials had a 3.2% gain.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison.
