Picture your Future. Save for it by earning 1.5% on a 1-year Term Deposit Account! Learn more.

BlackRock Commentary: Japan stocks: high can go higher

Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Ben Powell – Chief Investment Strategist and Carolina Martinez Arevalo – Portfolio Strategist all forming part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

Key Points

Room to run: We see Japan stocks climbing higher on robust earnings, corporate reforms and a Bank of Japan likely worried about returning to a chronic deflationary mindset.

Market backdrop: U.S. stocks jumped last week on further tech earnings beats. U.S. Treasury yields ticked down due to markets pricing out some rate cuts.

Week ahead: We’re watching U.S. PCE data out this week for further signs inflation is falling toward 2% this year as we expect. Yet we expect it to rebound beyond 2024.

We believe Japan’s equity rally has room to run – unlike some past false starts. We think both the macro outlook and company-level developments will drive the next leg. The corporate earnings growth we expected since 2023 is playing out. Yet we don’t see markets fully pricing in positive signs like corporate reforms. We think the Bank of Japan will cautiously wind down its ultra-loose monetary policy to avoid disrupting an exit from decades of no inflation. We stay overweight Japan stocks.

Japan’s Nikkei index hit a record high last week for the first time since 1989, when stocks soared to the point the real estate-driven bubble later burst. Those events led to decades of low or no inflation and mostly flat growth. The TOPIX (yellow line in chart) is near its own new record, outperforming most major stock markets in U.S. dollars except the S&P 500 (green line). What’s driving the stock surge? A weak currency has helped boost the value of corporate earnings made abroad. We expect earnings momentum to stay solid. A stabilizing U.S. dollar is not biting Japanese stock returns in the currency as much. And the excess yield investors receive for the risk of holding Japanese stocks over bonds looks attractive. Our positive outlook is about more than a weak yen. Higher inflation is allowing firms to raise prices and protect margins, while wage growth helps to keep fueling consumer spending.

March will be a pivotal month for Japanese markets, with the annual union wage negotiations – likely to shape the inflation outlook – taking place at the same time as the BOJ’s next policy meeting. The negotiations should help signal if inflation has become entrenched. We think the BOJ will end negative interest rates in coming months but will need more evidence of sustained inflation before raising rates further. We don’t see wages growing enough to keep inflation sustainably at the BOJ’s 2% target – and that’s why we don’t think the BOJ will tighten policy as much as markets expect. While not our expectation, we see a risk the BOJ tightens too quickly and too much. That scenario could be more damaging than a slight delay in policy adjustment, in our view, as it could undercut the BOJ’s attempt to end the long stretch of deflation, or no inflation.

Improving profitability

Corporate governance reforms are a key driver of the stock gains. The Tokyo Stock Exchange (TSE) has kept pushing for firms to improve their profitability and return money to shareholders. The TSE has begun disclosing companies that are planning to improve their capital management – a nudge to those that are trading below book value with no improvement plans. Since former Prime Minister Shinzo Abe introduced reforms more than a decade ago, Japanese firms have made some progress on boosting lackluster return on equity – or profitability. That has risen from negative levels in 2010 to 9%, LSEG Datastream data show. It is still half of the U.S. metric, but we think reforms can help narrow the gap. The ongoing earnings season is validating our expectations of robust growth, with TOPIX operating profits up 17% year over year, Bank of America data show.

Alongside these developments, a revamped government tax-free stock investment scheme kicked off this year aiming to stoke domestic investor flows into Japanese stocks. This scheme could facilitate Japanese savers reallocating some savings out of cash and into real assets, including equities, to try to preserve the value of their money in the new inflationary regime.

Our bottom line

We stay overweight Japanese stocks and think they can best their all-time highs. On top of support from the return of mild inflation, we see company-level developments driving the next leg of the rally. We don’t see the BOJ disrupting the optimistic outlook as it likely stays cautious on policy. We see Japanese stocks as attractive given their growth potential.

Market backdrop

The S&P 500 jumped nearly 2% last week, with more tech earnings beats boosting the upward momentum. U.S. tech gains lifted tech stocks globally, and a rally in chipmakers helped Japan’s Nikkei set a record for the first time since 1989. Meanwhile, short- and long-term U.S. Treasury yields fell lower from markets pricing out some Federal Reserve rate cuts this year. We think the positive market sentiment can persist for now as inflation cools and the Fed prepares to cut rates.

This week, we’re closely watching the release of U.S. PCE data – the Federal Reserve’s preferred inflation metric – for signs that inflation is still heading down toward 2% this year as we expect. Falling goods prices have been pushing inflation down, but we see that drag fading in due course. We think inflation will resurge due to stubbornly high services inflation, but we expect that to only become visible later this year.

Week Ahead

Feb. 27: U.S. consumer confidence, durable goods; Japan CPI

Feb. 29: U.S. PCE

March 1: Euro area inflation

BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of 26th February, 2024 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Information Document (KID), which may be obtained from MeDirect Bank (Malta) plc.

Join MeDirect today to access the tools you need to put your money to work on your own terms.

Latest news articles

BlackRock - Why we keep leaning into risk
All News

BlackRock Commentary: Why we keep leaning into risk

Investment opportunities are emerging amid a unique macroeconomic backdrop, with U.S. equities leading gains, particularly driven by AI-related companies, and expectations of continued volatility. The focus is on overweight positions in U.S., UK, and Japan stocks, while favoring quality short-term fixed income and private credit investments.

Epic Investment Partners Weekly Article
All News

Epic Investment Partners Views: The Week Ahead

This week’s key events include China’s Third Plenum, the ECB rate decision, US bank earnings, and several significant economic data releases from the US, Eurozone, and UK.. Last week, Fed Chair Powell highlighted progress on inflation but emphasised caution in rate cuts, while China’s economic recovery showed signs of weakness with lower-than-expected inflation and GDP growth.

Experience better Banking

The sooner you start managing your money, your way, using the best-in-class tools, the sooner you’ll see results. 

Sign up and open your account for free, within minutes.



We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.