Japan's Nikkei Crests to Record High on Chips, and More

Japan’s Nikkei 225 index both set and closed at a record high on Tuesday, despite concerns about the super-weak Japanese yen, now just shy of ¥161 to the U.S. dollar.

Chipmakers and exporters are leading an advance that saw the Nikkei gain rising 2.0%.

It took 34 years for the Nikkei to reclaim its bubble-era closing high of 38,915.87 set in 1989. But since passing that high-water level in February, Japanese stocks have not looked back. Today’s close is already 6.8% ahead of that mark set just before Japan’s bubble burst, sending the nation into the better part of three “lost decades” of deflation and frequent recession.

There are very solid gains indeed today for “Japan Inc.” standard bearers such as Hitachi HTHIY (T:6501), up 5.2% on the back of its broad portfolio taking in green energy, electronics and heavy industry, and media conglomerate Sony Group SONY (T:6758), up 5.0%.

Tech-investment specialist Softbank Group SFTBY (T:9984) rose 4.1% on Tuesday, to set a new record closing high at ¥11,730. I highlighted in a recent column that Softbank has positioned itself as a smart play on “Artificial Super Intelligence,” and that call is already paying dividends, investors getting behind the idea that founder Masayoshi Son has got his mojo back, and found new motivation to forge into this new realm of knowledge. Son believes Artificial Super Intelligence can surpass all human knowledge by a measure of 10,000 times.

Softbank shares have now virtually doubled for the year, up 93.9%, driven higher after the successful Wall Street listing of British chip designer Arm Holdings ARM. It still holds 89.8% of Arm, which is up 168.0% in 2024.

That has finally helped drive Softbank above its previous record stock price, set in 2000, before the tech sector experienced its own nasty bubble correction. Since time warps in the tech sector, you could argue that Softbank’s 24 years is longer than the 34 years it took the Nikkei’s industrials to rise above their own record.

Whatever way you look at it, it’s been a long time …

The Japanese market clawed back two trading days of declines to rise from the outset today, the rally gaining pace in afternoon trade. The blue-chip Nikkei 225 peaked at 41,769.35 and closed just shy of that, at 41,580.17. The index has risen 24.9% so far this year, well ahead of the 17.5% advance for the S&P 500, while the Dow – often compared to the Nikkei given their makeups – is only showing a 4.3% gain for 2024.

Investors are betting on the increasing likelihood of a U.S. rate cut in September, which is helping Japanese tech as well as markets such Taiwan, with the Taiex also closing at record levels, up 0.1% to end at 23,900. Taiwan Semiconductor Manufacturing Co. TSM (TW:2330), which I highlighted heading into this year as the Asian stock to watch, is up 75.4% so far in 2024, and also at a record closing high of TW$1,040.

But whereas the bulk of U.S. market gains have been posted by a handful of stocks, the Japanese market has had broader support. The Topix, which tracks all stocks on Tokyo’s main section, has risen 21.7% this year. Today’s Topix close, at 2,895.55, did not quite reset the record it established on July 4, of 2,898.47.

On Tuesday, you saw a strong showing not only for the likes of Tokyo Electron TOELY (T:8035), which makes equipment to make chips and rose 3.8%, as well as chip-testing equipment maker Advantest ATEYY (T:6857), up 4.1%, but also Uniqlo parent Fast Retailing FRCOY (T:9983), up 3.2%.

Japanese exporters typically benefit from a weak currency, which makes shipments out of Japan cheaper. Companies such as Toyota Motor TM (T:7203) and Honda Motor HMC (T:7267) that make their products in the United States also benefit from the strong dollar, which inflates profits when they are repatriated back to Japan, and into yen.

Toyota shares are up 24.1% in 2024, almost exactly the same gain as the Nikkei itself.

While Japanese stocks and companies are generally gaining from the extremely weak yen, which is really a result of an interest-rate disparity with a very strong dollar, the central Bank of Japan is concerned about the impact on consumers. Import prices rise with the weak currency, and Japan ships in all its oil, driving base costs for many industries higher.

Figures released on Monday show that real wages for Japanese households fell for a 26^th consecutive month, with inflation eating into consumer buying power. Average cash earnings rose 1.9% for April year-on-year, but that’s lagging behind the 2.5% core consumer inflation rate for May, meaning wages fell 1.4% when adjusted for inflation. The central bank says inflation will only be welcome when it’s accompanied by consistent gains in take-home pay.

A little-noted element of the yen’s weakness, as pointed out by The New York Times, is that it also hurts Japan’s defense budget. Japan is a key Asian ally of the United States, and a key customer for U.S. armaments. But these are priced in U.S. dollars, meaning the Japanese defense budget is losing ground while standing still.

Globally, the latest State Street Risk Appetite Index has just come out, demonstrating caution among investors. The index fell 0.09% in June, a “modest risk-off bias,” but notably long-term investors cut allocations to both equities (down 42 basis points to 53.2%) and bonds (down 46 basis points to 27.5%), to increase cash holdings by 88 basis points to 19.5%.

The almost 1% increase in the allocation to cash is the largest in 10 months, since August 2023. “Just a month ago, we speculated whether long-term investors would tolerate their cash holdings falling below their long-term average, given ongoing event risk,” including the U.S. election, Michael Metcalfe, the head of macro strategy at State Street Global Markets, notes. “June provided a definitive answer.”