Investing.com – The rally in Japanese stocks could potentially strengthen in the second half of 2024, Citi analysts said in a note, although certain conditions still need to be met to reach new record highs.
Japanese stocks, especially major stock indexes and indices, posted stellar performance in the first quarter of 2024, setting a series of all-time highs. But they have remained largely within a range since April amid growing uncertainty over the slowing Japanese economy and the Bank of Japan’s interest rate plans.
However, the Nikkei and TOPIX indices have risen between 14% and 17% this year.
Citi analysts have identified three key conditions that must be met for Japanese markets to resume growth to new highs.
First, they needed to separate themselves from their American counterparts in terms of restoring domestic demand, especially in areas such as personal consumption and capital spending.
Second, the depreciation of the yen, which has been one of the best-performing Asian currencies over the past two years, should stop and stabilize after reaching levels last seen in 1990.
Third, it is necessary to improve the profitability of Japanese companies by increasing return on equity.
Citi analysts say the recovery in personal consumption is especially important given that it powers more than 50% of the economy. First-quarter data released earlier this week showed a stronger-than-expected contraction in the Japanese economy, mainly due to a slowdown in consumption.
Consumption will improve this year, especially after several major unions pushed for sharp wage increases. But it remains to be seen how much consumption will improve, with persistent inflation in Japan a pressure point.
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Citi analysts said Japan’s economic recovery will likely boost domestic risk-exposed sectors such as retail, food, leisure and other sectors requiring discretionary services.
They have the potential to outperform the export-oriented industries that have largely fueled the Japanese stock market’s rally over the past two years. Japanese exporters have benefited greatly from the weakening yen in recent years.