Japanese stocks have made a blazing start to 2024, surging to three-decade highs as a weaker yen and expectations of interest rates staying low have re-ignited the strongest rally for years.
A 6% gain in the Nikkei (.N225) over the past two weeks is the best start to the year in a generation, according to LSEG data, and comes on the heels of a 28% jump last year --- the biggest annual gain in 10 years.
As chart levels break, dealers say hedge funds are rushing to chase the momentum and that the index's 1989 peak of 38,957 is in sight as more cash from home and abroad flows in.
Foreigners were net sellers in the first week of January, if derivative trade is taken into account, but were buyers of cash equities according to exchange data and sales desks say this week was even busier and that sellers have been scarce.
Last year drew 6.3 trillion yen ($43.5 billion) worth of net equity buying from foreigners, the largest in data stretching back a decade.
"Since the start of the year we see nine times more volume than December," said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore, with buying heavy in the technology sector.
"This flow is coming from long-short equity funds ... global investors who were hesitant to buy Japan in last quarter of 2023 now have more conviction to invest," he said.
The attraction is a domestic economy emerging from decades of deflation, an export sector supported by a weak yen and an expectation - strengthened by a deadly earthquake off the west coast in January - that monetary policy will stay supportive.
Core inflation seems to be settling in just above 2% and the Bank of Japan has given no indication of being in a hurry to arrest it - keeping the yen cheap by historical standards and traders expecting rates to stay negative until at least April.
That setup, Nomura analysts noted, has deterred selling - in contrast with world markets (.MIWD00000PUS) which have dipped 0.5% so far this year.
"The absence of sellers in the market may continue to support strong share prices for the time being," they said.
"We think the Nikkei 225's rise is unlikely to stop even at 35,000. Our forecast range for January–March is 33,000–37,000."
Kenji Abe, a strategist at Daiwa Securities, said his year-end forecast is 40,000. The index closed at 35,577 on Friday.
