The Rally in Japanese Stocks

William H. Witherell, Ph.D. - International Analyst
Mon Feb 5, 2024

Having attracted only limited investor interest for over two decades after reaching a record in December 1989, Japanese stocks surged ahead last year in a rally that came very close – within 6% – to the earlier record in mid-January.



The Nikkei 225 gained 7.7% in January and is up 31.7% over the last 12 months through January 31st. In comparison, the S&P 500 Index gained 18.35% over the same period. The MSCI ACWI ex-USA Index (global stocks ex-US) gained just 4.6% over the past 12 months, with a swoon in Chinese stocks being a major negative cause. The Shanghai Composite Index declined by 16.9%, and Hong Kong’s Hang Seng dropped by 29.5%. There are multiple factors underlying this recent striking outperformance of Japan’s stock market. They have implications for market prospects in the coming months. 

Turning first to the Japanese economy, GDP growth last year at 1.9% was almost double the 1% growth in 2022 and well above potential growth, which the Bank of Japan (BOJ) estimated to be between 0.5% and 1%. Potential growth is defined as the annual rate of growth an economy can sustain over the medium term without generating excess inflation. The IMF has just updated its World Economic Outlook, which projects Japan’s economic growth will decelerate to 0.9% in 2024 and 0.8% in 2025. The economy last year benefited from several one-off factors, including a depreciated yen and pent-up demand following the pandemic. The au Jibun Bank Japan Manufacturing PMI for January reports a modest deterioration in the sector with continued falls in output and new orders. This weakening may be an early indication of the forecast slowing of the economy. 

On the positive side, the IMF has increased its projections for global economic growth to 3.1% in 2024 and 3.2% in 2025, noting that the “recovery from the COVID-19 pandemic, Russia’s invasion of Ukraine, and the cost-of-living crisis is proving surprisingly resilient.” This resilience bodes well for Japan’s exports, which rebounded in December, led by auto shipments, particularly to the US. Exports to China rose for the first time in about a year. 

Global inflation has been subsiding faster than expected. In Japan overall consumer price growth continued to slow in December, to 2.6% from a year earlier. This figure is still above the Bank of Japan’s (BOJ) 2% inflation target. The BOJ’s just-released economic outlook says the likelihood that a virtuous circle of wage and price growth will strengthen has “continued to gradually rise.” The return of moderate inflation and wage growth is important for the timing of when to pivot away from large-scale monetary easing, end the BOJ’s negative interest rate policy, and begin further gradual loosening of yield curve control. The yen is likely to strengthen as a result, weighing on overseas earnings, and to cease being a tailwind for the market. 

Government policies have helped the recovery in Japanese stocks and will continue to be a positive factor going forward. From January 1, Japanese retail investors can invest up to 3.6 million yen ($24,000) a year in a tax-free Nippon Individual Savings Account. This instrument should attract a significant amount of the heavy cash holdings of Japanese retail investors. 

Also, ongoing governance reforms are finally having a significant effect, with companies being incentivized to use their capital more wisely. Shareholder payouts in the form of dividends and share buybacks are rising, and cross-shareholdings are being unwound. The Tokyo Stock Exchange is encouraging more emphasis on shareholder returns, with delisting being a threat. 

Japanese equities looked relatively cheap compared to other markets early last year, trading at a multiple of 12 times their earnings. This is no longer true, as they now are trading at a median multiple of 14 times earnings. 

The decline in the Chinese stock markets over the past 12 months has been an important positive development for Japan’s market. International investors who had been betting on a recovery of China’s stocks following the reopening of China after the lifting of Covid restrictions have come to view the Japanese market as much more attractive. Warren Buffett signaled this change with his major investments in Japanese trading companies. The size of the Tokyo Stock Exchange, with a capitalization of $5.67 trillion and its liquidity, makes it an attractive alternative for fund managers who wish to reduce investments in China while maintaining their exposure to the Asia region. Chinese retail investors are also moving funds from the Chinese and Hong Kong markets to Japan, or they are buying China-listed exchange-traded funds that track Japanese stocks. 

While there are, as always, risks going forward, there are reasons to expect the rally in Japanese stocks to continue to have legs. The prospect of a stronger yen affecting exports is the most likely headwind. The projected moderation of GDP growth is modest and it’s effects may be offset by the soft landing and steady growth of the global economy. Business investment and consumer services look likely to be sources of strength, as do semiconductors and related electronics. Given regulatory pressure and the still very high levels of unproductive cash that many companies are sitting on, returns on equity (ROEs) are likely to be supported by an acceleration of share buybacks. 

US investors have a choice of some 17 Japan equity ETFs listed in the US, according to, where extensive information on each is available. Two of the largest are EWJ and DXJ, which cover the total market. EWJ is the iShares MSCI Japan ETF, with $15.22 billion in assets under management. EWJ tracks a market-cap-weighted index that covers about 85% of the investable universe of securities traded in Japan. It’s one-year return is 16.1%. The second, DXJ, is the Wisdom Tree Japan Hedged ETF, with some $3.58 billion in assets under management. DXJ tracks an exporter-focused (that is, companies that generate less than 80 percent of their revenue from Japan) and dividend-weighted index of Japanese stocks that is currency-hedged for currency fluctuations between the US dollar and the Japanese yen. It’s one-year return is 46.3%. Both ETFs are currently included in Cumberland Advisors International and Global ETF Portfolios, in which the overall Japan position is overweight. 

No security mentioned in this note is among the author’s current investments. 

William H. Witherell, Ph.D. 
International Analyst



Sources: Wall Street Journal, Financial Times,,,, Oxford Economics,,,,


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