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Japanese Markets: Best Japanese Stocks February 2024

15 minutes
intermediate
Japanese Markets: Best Stocks 2024
Cristian Cochintu
Cristian Cochintu
21 November 2023

With Japanese markets scaling heights not seen since 1989, we look at what’s driving them, options to trade and invest, and we will also look at some of the best Japanese stocks to invest in 2024. Is this (finally) the time to invest in Japan?

Japan is one of the most technologically advanced nations in the world and one of the biggest economies, with the largest GDP after the United States and China in nominal terms. Japan enjoys technological advancements in some of the most complex industries in the world, and it is one of the few countries in the world that can manufacture its own semiconductors.

It has been among the top-performing markets in 2023, with its record gains accompanied by increased buying by foreign investors including Warren Buffett. Institutional investors like Goldman Sachs believe the case for a bull run is solid. 

How to Trade and Invest in the Japanese Markets – Quick Guide

  • Choose the Japanese markets you want to buy or trade – The Japanese market is the home to many well-known international companies, as well as one of the most quoted indices and one of the world's most-traded currencies.
  • Define your strategy – Trading lets you speculate on the price movement; dealing lets you take direct ownership of the shares of stocks and funds;  
  • Take your position – Create an account with CAPEX.com to start trading and investing in the Japanese markets.  

     

Japanese stocks have hit 33-year highs – but why?

The Japanese stock market has experienced an impressive upswing. Since January 2023, the Nikkei 225 index has risen by around 30 percent — by far outperforming US markets and European stocks. The boom is driven by foreign investors, with Berkshire Hathaway CEO Warren Buffet’s Japan visit seen as a ‘stamp of approval’ for investing in Japan.

However, a significant shift in Japan's economic performance is not what is causing the fresh interest in Japanese stocks. Following the COVID-19 epidemic in 2021, the economy has been growing at a rate that is nearly equal to its long-term potential of 1%. The good news is that the Bank of Japan does not need to increase interest rates because the pace of inflation is still manageable at roughly 3%.

Rather, the new-found interest in Japanese equities reflects three main considerations.

Japanese stocks are under-valued

First, Japanese stocks currently offer good relative value after significantly underperforming the US market for decades. For instance, according to Barclays’ calculations of cyclically-adjusted p/e (CAPE) ratios, Japanese stocks are currently cheap in comparison to U.S. stocks, having previously been significantly more costly. Japanese companies recognize this, and the corporate sector has been the largest net buyer of Japanese stocks.

Yen weakens to historic levels

The 15% depreciation of the yen versus the dollar during 2022 improved the international competitiveness of Japanese companies. Despite the yen's appreciation in the first part of 2023, it slumped back past 150 per dollar again and is inexpensive when considering purchasing power parity because Japan's inflation rate is far lower than the US one. The weakness has also been noted by BOJ policymakers, who next week must decide whether to tweak policy that has weighed on the yen for years.

Tensions between the U.S and China

Japan is benefiting from heightened tensions between the U.S. and China, which have caused international investors to diversify away from it. Accordingly, some investors view Japan as a safe way to play China’s growth. Financial Times notes that seven of the world’s largest semiconductor makers have made plans to increase manufacturing and deepen tech partnerships in Japan.

So, does this mark a turning point in which the Japanese stock market will outperform after it stagnated while US stocks soared ten-fold in the past 30 years (see chart)?

Japanese stocks have hit 33-year highs
Strategists at Goldman Sachs believe the case for a bull run is solid, and they are recommending Japanese stocks to investors. However, many institutional investors, including BlackRock, the world’s biggest asset manager, are not convinced this marks a fundamental turning point.

How to Enter the Japanese Markets?  

There are at least four ways a foreigner can get exposure to the Japanese markets:  

Indexes of Japanese stock markets. The most widely quoted index in the international financial media is the Nikkei 225 (JAPAN225), which tracks the 225 largest companies based in Japan.Japanese stocks listed on the TSE or on the US Stock Exchanges via ADRs. An American Depository Receipt (ADR) is a negotiable certificate that represents a share or several shares in a foreign company. 
Exchange-traded funds (ETFs) that focus on Japanese stocks. There are many to choose from, from the largest providers like iShares, Vanguard, and State Street SPDR.  Japanese YEN, a popular safe haven asset. The Yen is one of the world's most-traded currencies on the FX market, with USD/JPY the second-most traded currency pair globally.

Japanese Stock Indices

There are millions of investors interested in allocating part of their capital to Japan, so there is a big incentive for companies to create and promote stock market indexes.

The important thing when it comes to using a stock market index is not necessarily who calculates it, although this is a fact that we will mention. What is most important is knowing how it is calculated. This includes things such as how many companies are included in an index, what criteria are used to select them, and how those companies are weighed. That information will allow you to identify the index that best suits your needs.

Nikkei 225

The Nikkei Index (also referred to as the Nikkei 225) is a stock market that lists the 225 largest companies based in Japan. The featured stocks on the index are weighted based on the share price.

As the main Japanese stock market index traded on the Tokyo Stock Exchange (JPX), the Nikkei 225’s performance is representative of what’s happening in the local economy. Due to the size of the Japanese economy and its position on the continent, the Nikkei 225 index can be a useful indicator of market sentiments in the Asian markets.

The companies listed on the Nikkei 225 index include global brands such as Sony, Canon, Toyota, Nissan, and many others. The 225 companies are spread out over 35 industries, with each stock measured based on its performance.

A very curious feature of the Nikkei 225 is that, unlike most other global stock indexes, it weights companies based on their price, instead of their market capitalization or market capitalization adjusted for free float. As a result, the size of a company has no impact whatsoever on how important the stock will be within the index.  

With CAPEX.com, you can trade the NIKKEI 225 Index with the symbol Japan225 (leveraged product) which allows you to trade long and short.

    

Other top Stock Market Indexes in Japan

Nikkei publishes additional stock indexes for the Japanese stock market. Two of them are Nikkei 300 and JPX Nikkei 400.

Nikkei 300 weights its companies based on their market capitalization, that is, how big they are. This means that larger companies receive a higher weighting within the index.

The JPX Nikkei 400 is composed of 400 of the 1,000 largest and most liquid companies traded on the Tokyo Stock Exchange. These 400 companies are selected based on a few criteria, such as their market capitalization, their return on equity, as well as their accumulated operating profits.

The Tokyo Stock Exchange also calculates the Tokyo Stock Exchange REIT index. It is composed of all real estate companies listed on the Tokyo Stock Exchange that are incorporated in the form of Real Estate Investment Trusts (REITs).

Popular Japanese Stocks to Watch in 2024

With the current economic situation in Japan laid out, it is now time to look at some of the best Japanese stocks to watch in 2024 and beyond. Please be advised that the list of best Japanese stocks is subjective and may differ for each individual investor:

Today, we'll look at some top Japanese stocks to invest in, with the notable picks being Toyota Motor Corporation (TM), Sony Group Corporation SONY), and Honda Motors (TM).

Toyota – The Largest Japanese Stock by Market Cap

This venerable carmaker is probably the first that pops into mind when the discussion turns to Japanese stocks. For many years, Toyota (TM) has supplied automobiles to Western markets. It is today among the biggest car companies in the world, operating on a genuinely global scale. Additionally, it has entered the electric vehicle sector, concentrating on hybrid cars, and is also concentrating on producing EV batteries, particularly solid-state batteries, which are generally regarded as the battery technology of the future.

Toyota – The largest Japanese Stock by Market Cap
Toyota is a trusted name with decades of experience on its side. The company has also done a great job cornering the market for smaller, more affordable EVs and hybrids. Many experts considered it to be a winner among EV stocks before Japan’s economic prosperity started making headlines. Now it is even better positioned to enjoy a year of growth as Japanese stocks continue to ride to the top.

Toyota was one of the best Japanese stocks in 2023, gaining almost 50% from its April lows around $130. Looking forward, analysts forecast Toyota stock to test and even surpass the all-time highs in 2024.

SONY – One of the Best Japanese Stocks to Watch in 2024

Sony Group Corporation (SONY) is a global consumer electronics, media, video gaming, and entertainment giant that has a presence in nearly every major market. Sony was not one of the best-performing Japanese stocks in 2023, showing only a moderate price increase.

Looking ahead, SONY is poised to make a foray into cloud gaming, signaling its intent to expand beyond traditional consoles. The company recognizes the significance of cloud computing in capitalizing on the growing trends in mobile gaming.

SONY – One of the Best Japanese Stocks to Watch in 2024
Additionally, SONY is strategically expanding its market share in the thriving business of camera smartphones by acquiring additional land near its image sensor factory in Kumamoto prefecture, Japan. However, SONY’s optimism about the future seems to overlook the uncertainties and risks associated with the smartphone market.

Honda – One of the Most Undervalued Japanese Stocks

Japan’s second-largest automaker, Honda Motor stock (HMC), has seen its stock outperform in 2023, rising by over 20%. Although the recent performance of the company’s automotive business has been mixed, the company’s outlook is looking better. Honda’s motorcycle business has been growing strongly, led by emerging markets such as India, Vietnam, and Thailand.  

So, is Honda stock undervalued at current levels? There are some macro trends that could benefit Honda and other automakers. The commodity price environment is improving with inflation cooling off. Semiconductor and supply chain issues are also likely to ease, helping production. At the same time, demand has remained strong, with consumers willing to spend more per vehicle. This could help Honda’s overall revenues and profitability over FY’24. Honda is looking at automotive shipments of about 4.35 million units for FY’24, marking an increase of about 17% year-over-year.  

Honda – One of the Most Undervalued Japanese Stocks
Operating margins are also expected to pick up slightly to 5.5% in FY’24, driven by improved factory utilization and volumes. Honda’s valuation also appears compelling. The stock trades at about 8x projected FY’24 earnings, which is well below larger rival Toyota. Honda is also making reasonable progress with the transition to EVs, despite its relatively late entry into the space. The company plans to launch 30 electric models by 2030 by investing about 5 trillion yen (about $38 billion).  

With CAPEX.com you can trade Toyota, Sony, or Honda stocks or buy shares of stocks with an Invest Account.

    

Other Top Japanese Stocks

Mitsubishi UFJ Financial Group, Inc. (NYSE: MUFG) is one of the biggest banks in Japan in terms of total assets. The firm made history in October 2023, when it became the first Japanese bank to sell U.S. dollar-denominated bonds.

Nomura Holdings, Inc. (NYSE: NMR) is a financial services firm headquartered in Tokyo, Japan. It is one of the largest Japanese firms of its kind and provides services to both retail and institutional investors. The firm is currently interested in moving away from its traditional retail business division, and it is offering a new fund for the ultra-wealthy for this purpose.

Sumitomo Mitsui Financial Group, Inc. (SMFG) is a global bank that is headquartered in Tokyo, Japan. The firm expanded its global and American portfolio in July 2023 as it launched a digital banking service in the U.S.

Mizuho Financial Group, Inc. (MFG) is a global Japanese bank with a presence in the retail, corporate, and institutional markets. Its profit for the quarter ending in June saw a strong 54% annual growth, with the figure itself representing more than a third of the bank's annual profit forecast.

Takeda Pharmaceutical Company Limited (TAK) is one of the oldest companies in the world since it was set up in 1781. It is a healthcare and pharmaceutical firm that sells drugs for cancer, immune system disorders, and other ailments. The shares are rated Buy on average.

Popular Japanese ETFs

Overall, the lowest-cost and simplest way to invest in a diversified basket of Japanese stocks is through a fund that tracks an index of Japanese stocks. The largest by net assets is iShares MSCI Japan ETF, while the best-performing Japan-focused fund over the past several years has been the WisdomTree Japan Hedged Equity (DXJ).  

iShares MSCI Japan ETF

The iShares MSCI Japan ETF is issued by BlackRock, the largest financial asset manager in the world. The fund tracks the MSCI Japan Index, which is an index representing large and medium-sized Japanese stocks. The index covers almost 240 companies and represents 85% of Japan’s stock market.

The top ten holdings of the fund based on the size of capital allocation are Toyota, Sony, Mitsubishi Financial Group, Keyence, Tokyo Electron, Hitachi, Mitsubishi, Sumitomo Mitsui Financial Group, Shin Etsu Chemical, and Daiichi Sankyo. Toyota accounts for roughly 5% of the fund’s capital allocation, and Daiichi Sankyo roughly 1.6%.  

The main economic sectors represented in this fund are Industrials (~23%), Discretionary Consumer Goods (~19%), Information Technology (~14%), and Financials (~12%). The rest of the fund’s capital is spread in varying smaller amounts over several other sectors, including Health Care, Communication, and Staple Consumer Goods.

With CAPEX.com, you can trade the iShares MSCI Japan ETF which allows you to trade long and short. The fund trades under the ticker symbol ‘EWJ’ on the New York Stock Exchange (NYSE).

Other Japanese ETFs

WisdomTree Japan Hedged Equity Fund ETF has $2.7 billion in assets and charges an expense ratio of 0.48%. WisdomTree uses a proprietary index that focuses on factors such as dividend payouts and export revenues rather than company size. As a result, the portfolio has a 19% stake in small and midsize firms.  

The fund is also notable for hedging currency swings, protecting U.S. investors against losses when the value of the yen drops against the dollar.

One of the best-performing actively managed, Japan-focused mutual funds (available to individual investors) over the past three- and five-year periods is Fidelity Japan (FJPNX).

Portfolio manager Kirk Neureiter's heavy investment in tech stocks (23% of assets) has benefited from the tech industry's search for suppliers based outside of China. Yet, Japanese tech firms are generally trading at lower price-earnings multiples than similar tech companies in the U.S., he notes. For example, semiconductor company Renesas Electronics (RNECY) is one of the fund's top five holdings.  

The Japanese Yen: A Popular Safe Haven Asset

Just seven currencies account for 83% of the forex market, and the Japanese yen is one of the largest currencies, in terms of international trade and forex trading. In modern times, the Japanese yen is typically seen as a 'safe-haven' asset.

The Japanese Yen: A Popular Safe Haven Asset
Source: BIS

Consistently maintaining both a current account surplus and a low inflation rate, the Japanese financial system is said to be relatively stable compared to other global economies, which helps the yen maintain its 'safe-haven' status.

In periods of economic uncertainty, the yen is likely to increase in value; those looking to avoid risk will buy the yen and sell other 'riskier' currencies. By contrast, when the market is stable and risk tolerance increases, safe haven currencies, including the yen, are likely to be sold as the market looks to buy and hold currencies with a higher interest rate.

Regarding monetary policy, the choices of the Bank of Japan (BoJ) significantly influence both the market outlook and the performance of the Japanese yen.

Generally, any decision deemed to be 'tightening' of monetary policy is likely to increase the value of the Japanese yen; when monetary policy is tightened, stock markets are expected to endure some selling pressure, contributing to higher demand for the yen as a means of risk aversion.

USD/JPY is the second-most traded currency pair in the FX Market

One of the seven major currency pairs, USD/JPY has many interesting attributes. Not only is USD/JPY the second-most traded currency pair globally, at 18% of FX market volume according to BIS, USD/JPY is renowned for its high level of market liquidity, meaning that movements in price can be more consistent and stable when compared to other currency pairs.

As an example, currency pairs like EUR/JPY and GBP/JPY have a lower level of market liquidity, so price action is likely to be more erratic, which may be less suitable for currency trading beginners.

With CAPEX.com you can trade USD/JPY, EUR/JPY, GBP/JPY, CHF/JPY, AUD/JPY, NZD/JPY, and CAD/JPY with tight spreads and a negative balance protection policy.

    

Trade and Invest in the Japanese Markets with CAPEX.com  

Investing and trading are both ways to get exposure to the Japanese stock markets. Even though both offer the potential to profit or lose from the financial markets, they differ fundamentally.  

Invest    

Investing means that you will own the physical shares of stocks and funds until you decide to sell them. When investing, you need to commit to the full value of the investment upfront. If your shares are worth more when you sell them than when you bought them, you’ll make a profit. But, if the price has declined, you’ll incur a loss. While the potential for profit is technically unlimited, your losses are capped at your full initial outlay.  

You might want to invest in Japanese stocks if:  

  • You’re interested in buying and selling assets (stocks and ETFs)  
  • You’re focused on longer-term holding  
  • You want to build a diversified portfolio  
  • You want to take ownership of the underlying asset  
  • You want to receive dividends (if paid)  

CAPEX.com offers +5.000 stocks and ETFs with ownership.  

 

Trade  

Trading, on the other hand, enables you to predict share price movements without owning the underlying asset – and you can go long or short. This means that you can speculate on rising as well as falling prices. You also don’t need all the capital upfront, as you’ll trade using leverage. All you need to open a position is a small deposit called a margin. Keep in mind that leverage magnifies both potential profits and possible losses. This makes it vital that you manage your risk properly.  

Do you want to practice trading? Open a CAPEX.com demo account to trade in a risk-free environment.  

You might want to trade the Japanese markets if:  

  • You are interested in speculating on the underlying price of the assets (stocks, indexes, ETFs, commodities, bonds, currencies, cryptocurrencies)  
  • You want to trade rising and falling markets – going long and short  
  • You want to leverage your exposure  
  • You want to take shorter-term positions  
  • You want to hedge your portfolio  
  • You want to trade without owning the underlying asset  

CAPEX.com offers +2.000 leveraged products on stocks, indexes, commodities, ETFs, bonds, forex and cryptocurrencies.  

     

Free resources  

Before you start investing and trading in the Japanese markets, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you become a better trader or make more informed investment decisions.  

Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how leveraged trading works – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for stock investors who are looking to make a transition to leveraged trading.  

FAQs about Japanese Markets

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Cristian Cochintu
Cristian Cochintu
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Cristian Cochintu writes about trading and investing for CAPEX.com. Cristian has more than 15 years of brokerage, freelance, and in-house experience writing for financial institutions and coaching financial writers.