Japan’s Benchmark Topix Stock Index Is Heading for 1990 High

Japan’s Topix index is on course to regain its 34-year high as the equity benchmark finds support from financial stocks that benefit from higher interest rates, and as more companies take steps to improve shareholder returns.

The nation’s broadest equities gauge climbed to as high as 2821.86, above its March 22 peak and heading for the highest close since January 1990. That leaves it just over 2% away from its all-time record set the year before. The Nikkei 225 Stock Average of blue-chip companies reached the milestone earlier this year.

Value stocks such as banks and insurance companies led gains, with indexes for the two sectors up at least 2.5% as yields on the 10 year bonds continue their rise above 1%. Inflation data for Tokyo out on Friday morning picked up in June, likely keeping a potential interest rate hike on the agenda for discussions at the Bank of Japan’s July meeting.

The Topix hitting a record high within a week may be possible, said Ryoutarou Sawada, a senior analyst at Tokai Tokyo Intelligence Laboratory Co. The interest rate movements may support the financial stocks, and should there also be more moves to reduce cross-shareholdings, thus increasing returns, “this is enough to raise stock prices,” said Sawada.

Banks have contributed strongly to the Topix rebound since its trough in mid-April, on expectations that higher interest rates, will improve their profitability. Companies more broadly have also increased dividends and announced share buybacks at a record pace.

“Large-cap value stocks have been relatively strong over the past three months,” said Masahiro Ichikawa, a chief market strategist at Sumitomo Mitsui DS Asset Management Co. “Expectations for Japanese companies to manage their business in a cost-conscious manner continue to be high.”

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The weaker yen has also helped exporters, though recent levels have raised concern the negative impact on import costs and consumer sentiment, and increase the prospect of official intervention to bolster the currency. Inflation expectations have risen to the highest since at least 2004 by one measure, adding to the case for the central bank to raise interest rates.

Fund managers from Fidelity Investments to Janus Henderson expect banks to benefit from the BOJ’s shift, while a Bank of America Asia fund manager survey showed global investors are most overweight the sector in Japan.

Activists are taking a greater role in pressuring corporate governance reforms, pushing some shares higher. They have made 100 investments in Japanese companies with a market value of around $318 billion so far, according to data compiled by Bloomberg.

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The move has been supported by the Tokyo Stock Exchange’s push to boost Japanese stocks’ appeal, taking steps including listing companies that have voluntarily released plans to improve capital efficiency. The exchange in June said it will widen the universe of stocks that are included in the Topix index while reducing the number of constituents. Analysts expect the reform will place more emphasis on liquidity and pressure companies to improve their governance.

“We expect the macroeconomic uncertainties that weighed on stock prices in the first half to diminish, and think the corporate fundamentals will lead an uptrend of the market in the second half,” Rie Nishihara, a chief Japan equity strategist at JPMorgan Securities Co., wrote in a note.