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 marketWhile the American stock market, with its impressive performance, has been a favorite among investors, the Japanese market stands out as an attractive alternativeAnalysts who have shared insights on this topic over the past year generally agree on the grounded and neutral valuations of Japanese stocksUnlike 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 JapanThis 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 outlookThis year, activistic investors have been making headlines by purchasing Japanese stocks at rates exceeding past recordsData indicates that these investors have collectively acquired over 1 trillion yen (approximately 66 billion USD) worth of Japanese equities, marking a historic milestoneThe 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 ManagementAlso 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

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Even with some exits in their portfolio, the net purchases are estimated to exceed 500 billion yenIn 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 governanceThe shift from denial of issues to an acceptance of challenges has kicked off a wave of conscious reflection among corporate leadersThe 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 investmentsSimilarly, Strategic Capital Inchas made five new investmentsMeanwhile, 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 CompanyBritish firm Silchester is also heavily invested, owning shares in over thirty Japanese companies, including major construction firm Taisei Corpand heavy machinery manufacturer Sumitomo Heavy IndustriesThe 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 yearErin 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 JulyThe Nikkei 225 and the TOPIX indices have exhibited stability in recent months as investors seek clarity regarding exchange rates, Bank of Japan policies, and tariffsDespite 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 hurdlesThe 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 recoveryThis 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 gainsGoldman Sachs forecasts that the TOPIX index will achieve positive returns for the consecutive third year, aiming for a rise to 3100 pointsNotably, 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 maintainHebe 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 uncertaintiesThe 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 fluctuationsAdditional 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 uptrendThe critical support remains intact, with key resistance levels establishedShould the index break through the significant resistance range of 39,425 to 40,000, bullish investors might drive it to new historical peaksConversely, any breach below the critical 37,000 mark could signal a reversal of sentiment, resulting in further declines