Topix Japan is at its highest point since 1990

Japan’s Topix index hit its highest point since August 1990, signaling the return of foreign investors.

The Tokyo Price Index, also known as Topix, is up more than 6% year-to-date. The broad index, made up of nearly 2,000 members, is outperforming its regional peers in the Asia-Pacific region.

Topix rose 0.6% on Tuesday and continued higher on Wednesday, led by utilities, consumer cyclicals, technology and finance. Tokyo Electron, Oriental Land, Softbank Group, Sony and Nintendo were among the biggest gainers Wednesday morning.

“Foreign investors have returned — which says something about the nature of Japan’s stock market recovery,” Frank Benzemara and Tsutomu Saito, equity strategists at Societe Generale, said in a note on Tuesday.

“This is less [of] A trade-off of more than a broad-based fundamentals-based recovery, strong domestic demand, and a more generous dividend policy (accelerating share buybacks).”

The company noted that foreign investors bought 2.1 trillion yen ($15.4 billion) worth of Japanese stocks in April — adding that the Japanese corporate sector remains the largest net buyer of Japanese stocks, with a volume of 1.1 trillion yen year-to-date.

Nikkei 225 also rose to the highest level since November 2021, led by industry names including NSK, Mitsubishi Materials and Nippon Sheet Glass. The index topped the psychological level of 30,000 on Wednesday morning.

Earlier this year, shares in Japan’s five largest trading houses saw prices rise after Berkshire Hathaway Chairman and CEO Warren Buffett raised his stakes in the companies and hinted he might increase his holdings further.

Jesper Koll of the Monex Group told CNBC that Buffett’s recent trip to Japan to meet with business firms served as a “seal of approval” for investing in Japan.

Societe Generale strategists added that their excessive position on Japanese stocks had not changed.

They expect the central bank to extend yield curve control to 100 basis points above and below its target for 10-year Japanese government bonds at 0%.

Analysts wrote that such a move would be “bullish for the yen, but not automatically bearish for stock prices as the yen remains in undervalued territory,” adding that the corporate sector would have a competitive advantage to expand YCC.

The Bank of Japan shocked the bond markets in December when it last extended the range from 25 basis points to 50 basis points.

The Japanese Yen traded at slightly weaker levels to 136.43 against the Dollar on Wednesday.

At Kazuo Ueda’s first meeting as central bank governor, the Bank of Japan made no changes to its monetary policy while announcing a future policy review.

Societe Generale’s strategists said the BoJ’s change in monetary policy would likely be “a very gradual process with no abolishment of the BoJ board.” [Yield Curve Control] Increases in policy and interest rates are expected in the next two years.”

“Maintain an excess position in Japanese equities, unhedged and biased towards banks, financial institutions and value,” they wrote.

Goldman Sachs said in a May 12 report that the investment bank sees “a number of reasons” to support its bullish stance on Japanese stocks.

“Specifically, we note the strong fundamentals compared to equities in overseas markets, and we also believe that expectations for structural changes/reforms may push Japanese equities higher,” wrote Kazunori Tatebe, a Japanese equity strategist.

Noting that there is an opportunity for structural reforms in the future, he added, “We believe that the main risks to our optimistic view of Japanese stocks are from external factors such as the US debt ceiling problem, recession risks, and geopolitical risks.”

— CNBC’s Lim Hui Ji contributed to this report.