As 2024 comes to a close, a retrospective glance at global stock markets reveals a surprising contender in the race for investor attention: the Japanese stock market. While the American stock market, with its impressive performance, has been a favorite among investors, the Japanese market stands out as an attractive alternative. Analysts who have shared insights on this topic over the past year generally agree on the grounded and neutral valuations of Japanese stocks. Unlike the soaring valuations seen in the American and Indian markets, Japan offers a balanced approach, indicating a stable economic environment capable of supporting a structural bull market.

One major factor contributing to this positive outlook is the gradual improvement in corporate governance within Japan. This transformation, often described as a “trickle-down” effect, has been initially observed among larger corporations. As these giants adapt and enhance their management practices, the ripple effects are expected to reach medium and small enterprises, further perpetuating an environment conducive to growth and investment.

Investor sentiment confirms this optimistic outlook. This year, activistic investors have been making headlines by purchasing Japanese stocks at rates exceeding past records. Data indicates that these investors have collectively acquired over 1 trillion yen (approximately 66 billion USD) worth of Japanese equities, marking a historic milestone. The mood among analysts remains buoyant as they continue to project a positive trajectory for Japanese stocks into 2025.

Leading the charge are several high-profile activist investors, including global hedge fund behemoths like Elliott Investment Management and regional players like Oasis Management. Also participating in this movement are prominent Japanese investors, such as Yoshiaki Murakami, known as Japan's “Graham.” To date, these investors have injected capital into more than 146 companies, significantly influencing the market landscape. Even with some exits in their portfolio, the net purchases are estimated to exceed 500 billion yen. In light of this substantial buying activity, these activists now own a staggering 4.8 trillion yen in Japanese stocks, making them the largest investors in the market aside from companies pursuing stock buybacks.

Kazuhiro Toyoda, the head of Japanese equities at Schroders Investment Management, remarked on the transformational impact these investors have had on corporate attitudes towards governance. The shift from denial of issues to an acceptance of challenges has kicked off a wave of conscious reflection among corporate leaders. The presence of these activistic investors significantly informs the investment decisions made by fund managers, emphasizing their growing importance in shaping market trends.

For instance, Elliott Investment Management has ramped up its activities in Japan with notable investments in 2024 alone, including a considerable 2 billion USD stake in SoftBank Group. In contrast, between 2020 and 2023, the firm only engaged in three investments. Similarly, Strategic Capital Inc. has made five new investments. Meanwhile, Oasis Management has launched an unprecedented twelve public initiatives, indicating a burgeoning activist presence in Japan.

The most significant activist investor of the year is Effissimo Capital Management Pte, which boasts considerable holdings in companies such as Kawasaki Kisen Kaisha, Dai-ichi Life Holdings, and Ricoh Company. British firm Silchester is also heavily invested, owning shares in over thirty Japanese companies, including major construction firm Taisei Corp. and heavy machinery manufacturer Sumitomo Heavy Industries. The enthusiasm surrounding shareholder activism suggests that a flurry of activities is expected throughout the next year as participants prepare for further engagement with corporate leadership.

Expectations for 2025 suggest that the positive momentum in the Japanese market will likely continue. In addition to these activist forces, institutional analysts maintain an optimistic view of Japanese stocks heading into the new year. Erin Browne, a managing director at global bond powerhouse PIMCO, expressed her thoughts in a recent interview, stating that the Japanese stock market remains under its peak value experienced before the volatility seen in late July. The Nikkei 225 and the TOPIX indices have exhibited stability in recent months as investors seek clarity regarding exchange rates, Bank of Japan policies, and tariffs. Despite this, the structural tailwinds created by governance reforms and a positive wage-price dynamic offer a supportive backdrop for future stock market performance.

Goldman Sachs has echoed similar optimism in its 2025 economic outlook for Japan, identifying key events that have allowed the country to overcome significant inflationary hurdles. The formation of a robust wage-price spiral has implications that resonate beyond Japan, affecting global economic conditions. Analysts at Goldman predict consistent expansion in consumer spending, exports, and capital investments in the upcoming year, which will facilitate a faster recovery. This environment is expected to yield real and nominal GDP growth rates of 1.2% and 3.4%, respectively, indicating a return to more robust economic health.

The convergence of a favorable macroeconomic environment and corporate earnings growth trends positions the Japanese stock market for further gains. Goldman Sachs forecasts that the TOPIX index will achieve positive returns for the consecutive third year, aiming for a rise to 3100 points. Notably, the TOPIX has already gained over 10% year-to-date, with expected earnings per share (EPS) growth of 30% between fiscal years 2024 and 2026.

However, analysts remain cautious, acknowledging the delicate balance the market must maintain. Hebe Chen from IG International emphasizes that while the Nikkei 225 Index has demonstrated resilience, it also displays inherent vulnerabilities. As it approaches 2025, market sentiment will be shaped by conflicting economic fundamentals and macroeconomic uncertainties. The ongoing rise of the Nikkei 225 has fostered optimism among investors, but they must navigate the potential volatility introduced by the Bank of Japan's anticipated interest rate hikes, which could heighten market fluctuations. Additional external risks, including escalating trade tensions involving the US and other economies, further complicate the outlook.

Technically, Chen notes that despite recent fluctuations, the Nikkei 225 Index maintains a broader uptrend. The critical support remains intact, with key resistance levels established. Should the index break through the significant resistance range of 39,425 to 40,000, bullish investors might drive it to new historical peaks. Conversely, any breach below the critical 37,000 mark could signal a reversal of sentiment, resulting in further declines. Overall, the ability to overcome this recent downward trend is paramount to preserving upward momentum and retesting July’s peak.