Wallex Industry Insights: Japan

In the land of the rising sun, a new dawn emerges for investors as the Nikkei charts unprecedented heights. Is Japan, renowned for its rich cultural heritage and technological innovation, poised for a financial renaissance?

In this edition of Wallex Industry Insights, we analyse what contributed to the rise of the Nikkei and examine the industries poised to ignite a revitalisation in the Japanese shares market.

Join us as we explore the intricate tapestry of Japan's economic landscape, including an in-depth look at the history and significance of the Nikkei index.

From its humble beginnings to its current status as a global economic barometer, we unravel the layers of this iconic index to provide a comprehensive understanding of its role in shaping Japan's financial future.

Quick Facts: What is the Nikkei?

• The Nikkei, otherwise known as Japan's Nikkei 225 Stock Average, is Japan’s leading stock index that comprises the top 225 blue-chip stocks in Japan.
• The Nikkei is the Dow Jones Industrial Average (DJIA) equivalent in the United States.
• The Nikkei is a price-weighted index, in which each component of the index is weighted according to its current share price (i.e. the index is an average of the share prices of all listed companies).
• Examples of notable companies featured in the Nikkei: Canon Inc, Honda Motor Company, Nissan Motor Company, Sony Corporation, Toyota Motor Corporation.
• The Tokyo Price Index (TOPIX) is another Japanese stock index that is a capitalisation-weighted index that includes all the stocks in the Tokyo Stock Exchang

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History of the Nikkei

Originally known as the Nikkei Dow Jones Stock Average between 1975 and 1985, the index is now named after the Japan Economic Newspaper (Nihon Keizai Shimbun) – otherwise known as Nikkei – which finances the calculation of the index.

Calculations of the index began in September 1950, with data retroactively applied from May 1949. The Nikkei was inaugurated during Japan’s post-World War II reconstruction and industrialisation era. Unlike other indexes that are ranked by market capitalisation, the Nikkei’s constituent stocks are ranked by share price, with valuations denominated in Japanese yen. An annual review takes place every September to implement any necessary adjustments to the composition of the Nikkei.

Behind the Rise of Nikkei

Since 2024 started, Japanese stocks have surged to surpass the historic peak set over three decades ago, as global investors (majority of whom were first-time investors into the country) funnel funds into a nation they believe is finally emerging from deflation and is now on a trajectory toward sustainable economic expansion.

On 22 February 2024, the Nikkei 225 Index closed at 39,098.68, breaching its previous record. This surge was propelled by gains in technology stocks and semiconductor equipment manufacturers following Nvidia's impressive sales forecast. This remarkable resurgence, which exceeded even the duration of Wall Street's recovery from the crash that precipitated the Great Depression, signifies a revival for Japan's stock market.

But what exactly sparked this rise in 2024? Which industries were the main players behind this economic comeback? And what opportunities does this present to international businesses?

Amidst this resurgence, specific industries have played a pivotal role in driving Japan's economic growth. Our analysis will zoom in on these sectors, exploring how advancements in technology, particularly in the semiconductor and tech industries, have fuelled investor optimism.

Japan’s Manufacturing Sector

The growing optimism in Japan’s stock market is in large part due to the record earnings in the manufacturing sector, where aggregate net profits listed by Japanese manufacturers rose by more than 20%.

The automotive industry, in particular, has emerged as a powerhouse driving earnings growth within the manufacturing landscape. Profits of car manufacturers and related components surged by an impressive 95%, reaching that of 4.550 billion yen. This figure accounts for approximately 40% of the total earnings in the manufacturing sector, underscoring the pivotal role of the automotive industry in Japan's economic revival.

Notably, industry titan Toyota Motor witnessed net profits soaring 2.1 times to 3.950 billion yen in the first three quarters of the fiscal year. This remarkable growth trajectory can be attributed largely to robust sales of hybrid vehicles in the lucrative North American market, positioning Toyota as a frontrunner in driving the resurgence of Japan's automotive sector.

Japan’s Chip Industry

Japan’s official support for the semiconductor industry expenditure, relative to its GDP, is

Referencing a report by Nikkei News, Japan’s official support for the semiconductor industry expenditure, relative to its gross domestic product (GDP), far surpasses that of her counterparts such as the United States and other major Western countries.

Once a chip-making powerhouse, figures from the Japan’s Ministry of Finance’s Fiscal System Council reveal an investment of JPY 3.9 trillion (USD $26 billion) – equivalent to 0.71% of its GDP – to revive the semiconductor industry, with a strategic focus on chips used in the automotive sector.

Of this substantial amount committed, a third of it has gone to Taiwan Semiconductor Manufacturing Company, that promises to revitalise the unassuming Japanese farm town of Kikuyo into a key node in Asia’s chip supply chain.

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How international businesses can tap on Japan’s revitalised industries?

As Japan's manufacturing sector experiences a resurgence, international businesses have a prime opportunity to capitalise on the potential of the automotive industry’s strengthening position. With the automotive industry leading the charge, driven by robust profits, global companies can explore partnerships and expansion opportunities within Japan's dynamic market.

Additionally, Japan's commitment to revive its semiconductor industry presents a promising avenue for international businesses to tap into cutting-edge technology and innovation. By leveraging Japan's strategic focus on key sectors such as automotive and semiconductor manufacturing, international businesses can pivot their strategies to target the Japanese market and achieve sustained growth and success in one of the world's most vibrant economies.

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