Riding the Wave? Expert Insights on Japan’s Booming Stock Market and New NISA Strategies for Beginners

Nikkei Stock Average, bottoming out by the end of March and then possibly going up…

Japanese stock prices have been rising and are approaching the highs of the ’89 bubble period. We talked to an expert about what the background is, what will happen in the future, and what individual investors should do.

The Nikkei Stock Average has been performing well since last year and has risen even higher this year, reaching 36,984 yen at one point on January 23. It is now close to its highest price of 38,915 yen, which was reached at the end of 1989.

Mutsumi Kagawa, chief global strategist at Rakuten Securities, advises that ordinary retail investors should keep in mind the following five factors when considering stock investments : long-term, diversified, accumulation, low-cost, and tax-efficient investments. Mr. Kagawa commented on the future of the Nikkei Stock Average , “ It is not surprising to see it exceed38,000yenthis year.Next year, the level of 40,000 yen is also conceivable, depending on the situation,” he believes.

The current stock price, on the other hand, “has been rising at too fast a pace, so it has been struggling,” Kagawa believes, and there is a possibility that it will bottom out by the end of March and then move higher.

Why Japanese stocks are rising…Foreign investors account for “about 70%” of trading volume in the Tokyo market.

Why are Japanese stock prices rising in the first place? Mr. Kagawa focuses on the trends of foreign investors and individual investors. In particular, he points out that foreign investors account for about 70% of the trading volume in the Tokyo market.

First, “foreign investors are reviewing and buying Japanese stocks,” says Kagawa. With the recent rise in prices, Japan is emerging from its long-lasting deflationary economy, and foreign people believe that as prices rise, individuals and companies that have mainly deposited money will start to invest to counteract the diminishing value of their deposits.

Furthermore, they believe that the Tokyo Stock Exchange’s request for companies to take measures to correct their stock prices will also have an effect. Specifically, share prices are to improve in comparison to net asset value per share (PBR); a company with a PBR of less than 1x means that it has not reached the amount of money it could have sold its assets for after dissolution. This means that companies with P/B ratios of less than 1x have not reached the value of their assets sold in the dissolution. Companies have been taking stock price countermeasures, such as share buybacks, dividend enhancements, and medium-term management plans that lead to earnings growth. Because of these factors, Kagawa believes that corporate earnings will continue to increase in the future.

Another is that Japan’s position in the Asian market has been reaffirmed. The Chinese economy is undergoing an adjustment due to the bursting of the real estate bubble, and stock prices continue to fall. Mr. Kagawa points out that “foreign investors are beginning to reduce their investment in China, both direct and indirect. They are reducing not only direct investments such as factory construction, but also indirect investments such as stock purchases, and instead are shifting their investments to Japan and India, where there is a sense of stability.

Japan is also being reevaluated as a target for direct investment. There is even a move by a major Taiwanese semiconductor manufacturer to build a plant in Kumamoto Prefecture. Japan’s stability is being evaluated in terms of political risk and other factors.

There is no substitute for professionals when it comes to buying and selling individual stocks.”

He believes that an increasing number of Japanese individual investors are of a generation that has not experienced the pain of the bubble economy and its collapse, and that many of them have been successful in investing in U.S. stocks. The funds of such individual investors are entering the Japanese stock market as well.

Rakuten Securities is seeing an increase in the number of accounts held by young people and women. Young people have no resistance to the Internet.

Kagawa points out that online securities firms such as Rakuten Securities are increasing the number of accounts opened by offering zero transaction fees.

These developments are behind the recent rally in Japanese stocks. If Japanese equities continue to perform well in the future, what kind of investment activities are possible for individual investors?

Individual investors may not have the time to pick and choose individual stocks to invest in. They are not as good as professionals at trading individual stocks.

As mentioned at the beginning of this article, Mr. Kagawa offers five key words of advice. First, invest for the long term. Even if inflation diminishes the value of the assets in your savings account, for example, U.S. stock investments have outperformed inflation, he says. Short-term investments are susceptible to stock price fluctuations, but over the long term, it is easier to expect an increase.

Diversification is also important. Kagawa says, “You can’t always get it right with individual stocks. Specifically, he believes that investing in an index fund linked to a representative stock market index is a good idea.

Accumulating investments are those in which one invests small amounts of money on a monthly or bimonthly basis, and invests them in a steady manner. The more you accumulate, the more you can expect your assets to grow at a compound interest rate. Rakuten Securities has seen people invest as little as 30,000 yen per month, or as much as 100,000 yen per month. The stock price may fluctuate up and down along the way, but at the end of the day, the overall asset should increase,” says Kagawa.

The low cost cannot be overlooked. When securities firms and banks provide face-to-face customer service, their personnel and storefront costs are reflected in transaction fees. On the other hand, online brokerages do not incur such costs. Mr. Kagawa says, “You can also consider investing in index funds with the lowest possible costs. It is also important to keep the net return as low as possible,” he says.

Finally, there are tax-saving measures. When you invest in stocks, mutual funds, and other financial instruments, you are subject to a tax of about 20% on dividends you receive and gains you make on sales, but the government has a system that exempts you from paying this tax up to a certain limit. The NISA, which started in 2002, and the new NISA, which started this year, are the most profitable ways to take advantage of this system. Taking advantage of these will be profitable.

Individual investors can invest their core assets in the new NISA, etc., and if they still see a shortage of funds for future retirement and other needs, “they may consider investing other satellite assets in Indian index funds,” says Kagawa.

More than 60% of typical global stock index funds, such as “Orcan,” are U.S. stocks

Many individual investors may not know how to diversify their assets.

For example, public pension funds invest about half of their invested funds in stocks, with about half of their stock investments in domestic and half in overseas stocks, and about 90% of their overseas stock investments in U.S. stocks, according to Kagawa.

He also said that more than 60% of the leading global stock index funds are in U.S. stocks.

The allocation of investments in such a professional world may also be helpful.

Japanese stocks continue to do well, but… in the long run, are U.S. stocks still the way to go?

Mr. Kagawa points out that the background to the popularity of U.S. stocks is that “the U.S. population is growing and technological innovation is advancing.

Is there any blind spot in investing in Japanese stocks? The risk factor for Japanese stocks is the strong yen. If the yen appreciates rapidly, the performance of exporters such as automobile companies will suffer,” Kagawa said.

The biggest influence on the foreign exchange market is the trend of interest rates. Money flows to countries with high interest rates. The U.S. has repeatedly raised interest rates in response to rising inflation risks. Japan, on the other hand, has kept interest rates at ultra-low levels. The widening interest rate gap between Japan and the U.S. has led to the dollar’s appreciation and the yen’s depreciation.

Recently, inflation risks in the U.S. have calmed down and the possibility of further interest rate hikes has receded. In Japan, on the other hand, if wage hikes continue, the possibility of a review of the ultra-low interest rate monetary policy is increasing. A narrowing of the Japan-U.S. interest rate differential is likely to lead to a stronger yen and weaker U.S. dollar.

Mr. Kagawa is also paying attention to the “digital balance of payments. The more Japan uses U.S. information technology (IT) services such as Microsoft, Google, and Amazon, the more money falls on the U.S. side. This is the reason for the strong dollar and weak yen. Some estimates suggest that the use of U.S. IT services may amount to 7 to 8 trillion yen annually.

Those who are concerned about the recent rise in Japanese stocks may want to consider the five key words that Mr. Kagawa advises.