World-Beating Price Target Boost Shows Japan Rally Has Way to Go

Price targets for Japanese stocks have risen more than any other major market over the past three months, stoking the rally in the nation’s equities.

(Bloomberg) — Price targets for Japanese stocks have risen more than any other major market over the past three months, stoking the rally in the nation’s equities.

Japan has emerged as a winner as robust earnings results and the prospects for a solid domestic economic recovery underpin analysts’ bullish calls, while rising valuations on Wall Street shares are also seen justifying higher multiples for Japanese stocks. 

They boosted their targets on 193 Japanese firms in the Bloomberg World Large & Mid Cap Index by a weighted average of 10% over the past three months, the best performance among major markets worldwide, Bloomberg-compiled data show. In contrast, those on China and Hong Kong were cut by 2.5% and 5.6% respectively, with investors shifting funds out of the country into Japan and other Asian markets.

Japan bulls can still find ample support for the view that the rally can go further after massive gains this year, bringing the market closer to reclaiming its historical peak following three decades of stagnation. Strong performances by Japanese companies also increase the prospects of inflation sticking, giving more options for the Bank of Japan in unwinding its ultra-easy monetary policy. 

“You can be bullish at least until the end of this year,” said Yusuke Maeyama, researcher at NLI Research Institute. The price target revisions show how “analysts have been reacting positively to earnings” which are looking pretty good now, he said. 

The boost in price targets for Japan shares beats increases of about 9% for US stocks and some 6% for the measure overall, which covers 2,751 companies in 43 markets globally. Japan’s Topix index touched a 33-year high this week. 

“The earnings outlook has been improving sharply over the past half year or so,” said Ryuta Otsuka, a strategist at Toyo Securities Co. “This reflects the economic reopening gathering pace.”

The BOJ’s latest survey showed that sentiment among large Japanese companies has improved, and that they plan to increase capital spending in the current financial year to March. 

“There appear to be many specific reasons to buy Japanese stocks now,” said Hiroaki Tomori, chief fund manager at Mitsubishi UFJ Kokusai Asset Management. “Companies are hiking prices due to a rise in costs and a weaker yen. Inflation is helping to boost the attraction of Japanese equities.”

Analysts’ tendency to have higher price targets for many stocks most of the time mean investors may need to take them with a pinch of salt. “Brokerages almost always have the assumption that stock prices will go up,” said NLI Research’s Maeyama.

Another caveat is that analysts haven’t raised earnings forecasts that significantly, suggesting some of the hike in price targets may be stretched. 

Still, Mitsubishi UFJ’s Tomori said analysts’ earnings forecasts are likely to have further room to rise because the impact of the yen’s latest drop likely hasn’t yet been fully reflected in their expectations. The Japanese currency inched closer to 148 against the dollar this week, while the BOJ’s Tankan survey showed companies were assuming the yen would be at 132.43 for the current year.

The target level for the Topix index based on bottom-up analyst forecasts also rose almost 9% over the past three months to 2,555.8. That would be the highest level since early 1990 — just after the measure hit its historical peak — and about 7% above its current levels.

–With assistance from Shin Pei.

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