As 2024 draws to a close, global equity markets have seen varied performances, yet few can compete with the strength demonstrated by the Japanese stock market. In the broader landscape, the US markets and the Indian stock exchanges have captured significant attention for their high valuations, but analysts often regard the Japanese stock market as having a more balanced and reasonable valuation profile. Japan's inflation outlook is also perceived as a supportive factor, paving the way for a sustained structural bull market. This positive outlook is further supported by noticeable improvements in corporate governance within Japanese firms, creating a cascading effect where larger companies lead the way, encouraging mid-sized and smaller enterprises to follow suit, further bolstering investor sentiment.

As a result, the interest from investors in Japanese equities continues unabated. Data compiled this year shows that aggressive investors have poured over 1 trillion yen (approximately $6.6 billion) into Japanese stocks, achieving a historic milestone. Looking ahead to 2025, many analysts remain optimistic about the prospects for Japanese stocks, anticipating further gains.

Among the aggressive investors influencing this market surge are a notable number of foreign hedge funds, including the globally renowned Elliott Management and Oasis Management. Alongside prominent domestic investors such as Yoshitaka Murakami, often dubbed Japan's "private equity guru," and firms like Strategic Capital Inc., these investors have collectively acquired stakes in over 146 companies, making significant contributions to corporate governance transformations. Despite potential exits, net purchases from these aggressive investors may exceed 500 billion yen. Following this massive influx, it is estimated that these investors currently hold about 4.8 trillion yen worth of Japanese stocks, comprising approximately 0.5% of the market's total capitalization of 980 trillion yen. Their role as major buyers ranks just below firms engaged in share repurchases, with the actual scale of their activities likely to be even larger than disclosed.

Kazuhiro Toyoda, head of Japanese equities at Schroders Investment Management, noted that these investors have played a pivotal role in shifting the mindset of corporate management in Japan from “No, we don’t have any issues” to “Yes, we have challenges.” This evolution has become an important consideration in investment decisions made by firms like Schroders, underlining the tangible impact of aggressive investing on Japanese corporate share prices.

Elliott Management stands as a prime example, significantly bolstering its presence in Japan with four new investments over the course of 2024 alone, including a staggering $2 billion bet on SoftBank Group. In contrast, between 2020 and 2023, the firm made only three investments. Notably, Strategic Capital Inc. has pursued five new investments, while Oasis Management has launched a record 12 new public campaigns from its Hong Kong base.

The largest player among these aggressive investors is Effissimo Capital Management Pte, which holds substantial stakes in prominent companies such as Kawasaki Kisen Kaisha, Dai-ichi Life Holdings, and Ricoh Company. UK-based Silchester has invested in over 30 Japanese firms, including construction giant Taisei Corp. and heavy machinery manufacturer Sumitomo Heavy Industries. Market participants are bracing for a continuation of this intense shareholder activism into 2025, with Morgan Stanley analysts suggesting that a heightened focus on capital efficiency may encourage the rise of even more aggressive investors.

Looking toward 2025, analysts express a notable optimism regarding Japanese equities. Many analysts generally perceive an upward trajectory for the Japanese stock market leading into the year. Browny, a managing director and portfolio manager at the global bond giant PIMCO, recently remarked that Japan's equity market still trends below its peaks before the volatility spike and arbitrage trading unwound in late July. The Nikkei 225 index and the Topix index have remained stable over recent months as investors scrutinize the impacts of foreign exchange movements, monetary policy from the Bank of Japan, and various tariff implications. Notably, structural tailwinds such as corporate governance reforms and the anticipated commencement of a healthy “wage-price” cycle continue to position Japan attractively among non-US developed markets.

Unlike other Asia-Pacific markets that may react more violently, Japanese equities display a relative resilience, a factor attributed to the high proportion of Japanese companies establishing supply chains in the United States to service American clientele. Overall, surveys of fund managers reveal a cautious approach, with readiness to inject capital into the Japanese equities market once clarity emerges regarding these prevailing uncertainties, suggesting a potential restoration of upward momentum in 2025.

Goldman Sachs also affirms a positive outlook in its 2025 Japanese economic forecast report, advocating continued confidence in the Japanese stock market within the global context. The firm believes Japan has successfully navigated a crucial inflation threshold, leading to the development of a constructive "wage-price spiral" with far-reaching implications for both Japanese and global markets. They anticipate that robust consumer, export, and capital expenditure growth will aid Japan's economic recovery, with real and nominal GDP growth expected to reach 1.2% and 3.4%, respectively, marking substantial increases over historical averages.

This favorable macroeconomic backdrop juxtaposes with an encouraging trend in corporate profit growth, leading Goldman Sachs to predict that the benchmark index—Topix—could achieve positive returns for the third consecutive year, potentially climbing to 3,100 points as it has already risen over 10% year-to-date. Projected earnings per share (EPS) for the Topix index are forecasted to climb by 30% over the next fiscal years from 2024 to 2026, with a price-earnings ratio reaching 14.3 times. This indicates that continued corporate profit growth is the primary driver behind the gains observed in the Japanese stock market, rather than mere valuation expansion.

The performance of the Nikkei 225 index this year indicates both resilience and vulnerability moving into 2025. The future trajectory may hinge on a balance between beneficial economic fundamentals and ongoing macroeconomic uncertainties. Investor sentiment continues to be buoyed by remarkable economic resilience in Japan, fostering optimism around a stock market recovery. However, varying levels of uncertainties loom large. The anticipated interest rate hikes from the Bank of Japan in 2025 may introduce volatility into the market, while Japan's economic momentum will contend with several external risks, including a potential escalation in trade tensions between the US and other economies. Collectively, these factors could pose challenges to the sustained rise of the Japanese stock market.

From a technical standpoint, while there has been a recent pullback, the Nikkei 225 index continues to uphold its broader upward trend. The resistance levels between 39,425 and 40,000 remain pivotal, with support lines guiding the market trajectory. A breakthrough above this resistance may embolden bullish investors to propel the index to new historical heights. Conversely, if the index dips beneath the critical threshold of 37,000, it could signal a reversal in sentiment and potentially invite further declines. Regardless, overcoming the recent downward pressure on the trendline is vital for maintaining an upward momentum and revisiting the peak levels seen in July.