Investing.com — A Japanese stock rally may pick up in the second half of 2024, Citi analysts said in a note, although certain conditions still need to be met before new record highs can be achieved.
Japanese stocks, especially the benchmark and indexes, had a tremendous rally in the first quarter of 2024, hitting a series of record highs. But these two have largely stayed within their range since April amid increased uncertainty about a slowdown in the Japanese economy and the Bank of Japan’s interest rate plans.
Still, the Nikkei and the TOPIX have risen between 14% and 17% so far this year.
Citi analysts outlined three key conditions that needed to be met for Japanese markets to resume their rally to new highs.
First, they had to decouple from their US counterparts as a result of a recovery in domestic demand, especially in areas such as personal consumption and capital expenditure.
Second, the depreciation of the yen – one of the worst-performing Asian currencies of the past two years – needed to come to an end and the rate had to stabilize after last reaching levels reached in 1990.
Third, Japanese companies’ profit margins needed to improve, with an increase in return on equity.
Citi analysts said a recovery in personal consumption is especially important as it powers more than 50% of the economy. First-quarter data released earlier this week showed Japan’s economy larger than expected, largely due to slowing consumption.
Consumption is expected to improve this year, especially as several major unions have secured huge wage increases. But it remains to be seen how much consumption will improve as Japan’s persistent inflation is a point of pressure.
Citi analysts said a recovery in Japan’s economy is likely to boost domestically exposed sectors such as retail, food, leisure and other discretionary sectors.
These could potentially outperform the export-oriented sectors that have largely driven Japan’s stock market over the past two years. Japanese exporters have benefited greatly from a weaker yen in recent years.
