Japanese Stock Markets Continue to Test New Highs. Is the Rise Sustainable? – NBC Los Angeles

• This week, the Nikkei and Topix broke their previous records to reach new all-time highs on Thursday. The Topix notably broke a 34-year-old record set in December 1989.
• Jesper Koll, senior director at Monex Group, a Tokyo-based financial services company, tells CNBC that the current surge is driven by a single driver: profits.
• Nomura analysts, however, say these gains do not appear particularly sustainable, but could become so if corporate profits surprise on the upside.

Japanese stocks have seen a nice run in 2024.

In Februarythe country reference Nikkei 225 smashed his 1989 record.

This week, the Nikkei and Topix broke previous records reached new all-time highs on Thursday's closeThe Topix notably broke a 34-year-old record, set in December 1989.

How did the markets reach these levels, especially the Nikkei which reached new highs for the second time this year?

Earnings are the only driver of the current market rally, Jesper Koll, chief financial officer at Tokyo-based financial services firm Monex Group, told CNBC.

“Japanese companies today benefit from decades of operational restructuring,” Koll said, adding that “breakevens are at historically low levels, so even small increases in revenue fuel explosive profit growth.”

He predicted earnings growth of 35% over the next two financial years, from April 2024 to March 2026, as well as revenue growth of 4% per year.

His forecast stems from a prediction that Japanese companies will see growth in domestic and global sales, and he explained that his prediction of 4 percent sales growth is due to wage increases announced Thursday by Japan's largest labor union.

Japan's largest labor union, commonly known as Rengo, has announced that Japanese companies havegranted the biggest wage increases in 33This year.

The monthly wages of union-backed workers will increase by an average of 5.1 per cent this fiscal year ending March 2025. Rengo also said that large companies with 300 or more union-backed employees increased wages by 5.19 per cent, while small companies increased wages by 4.45 per cent.

“You don't have a shunto [wage hike] 5% and nominal sales up less than 4%, for example,” he points out.

But most importantly, Koll said, Japan is a “bastion of stability.” He stressed that its monetary, fiscal and regulatory policies are stable and pro-growth, which is an important support for financial markets.

When the Nikkei crossed the 40,000 mark in March, Koll told CNBC at the time that it was “perfectly reasonable” for the index to cross 55,000 by the end of 2025.

Koll told CNBC this week: “I stand by my forecast that the Nikkei 225 will climb to 55,000 before the end of next year.”

If his prediction comes true, that would represent a 37% increase from the 40,000 mark.

Koll had previously predicted that the Nikkei would cross the 40,000 mark within 12 months of July 2023. He proved correct when the index reached that level within eight months.

How sustainable is rallying?

However, the million dollar question will be: how long can this rally last?

The gains in the Nikkei and Topix do not appear sustainable, according to a Nomura note released Thursday. Analysts identified the gains as being due to short covering of futures contracts.

There is a caveat, however.

They said that “these early gains could prove sustainable if it starts to look likely that April-June corporate earnings surprise to the upside or that the Japanese stock market sees more long-term money inflows.”

In the short term, Nomura said futures will have “a lot to say” about the direction of Japanese stocks, noting that as of June 28, net short interest of foreign securities firms in futures stood at 17,000 contracts.

If these short positions were to be liquidated, Nomura estimates that the Topix would see a rise of about 2%-3% from its June 28 levels. By their calculations, this would put the Topix around 2,875 and the Nikkei 225 around 40,600.

Both indices have since exceeded Nomura's estimate, but not by much.

“We will monitor whether domestic equity mutual funds/ETFs listed in Japan and US-listed ETFs (which have seen outflows) start to see increasing inflows,” Nomura analysts said.