Nomura Outlook on Japanese Stocks: A "Value Stock Boom" is Expected in the First Half of Next Year, as Long as the Bank of Japan Continues to Raise Interest Rates

How long can Japanese value stocks continue to thrive? Nomura believes that by the first half of 2025, Japanese stocks will continue to "flow towards value stocks."

On the 19th, Nomura Securities pointed out in a research report that value stocks have performed well over the past four years, a trend closely related to the monetary policy of the Bank of Japan. As long as the pace of interest rate hikes continues, value stocks will remain a focus for investors.

Looking ahead to 2025, Nomura believes that export-oriented value stocks will become the market focus in early next year.

Value Stocks Have Performed Well for Four Consecutive Years

Recent data shows that investing in Japanese value stocks has been very profitable.

Nomura stated that since 2021, the value factor of the Japanese stock market (based on the inverse of the price-to-book ratio, or B/P) has recorded double-digit positive returns for four consecutive years. As of mid-November 2024, the return rate of the value factor reached 12.1%, far exceeding the average level since 1993.

However, it is worth noting that the historical valuation-based value factor (based on the B/P benchmark over the past 36 months) has not performed well, recording negative returns for two consecutive years.

Nomura Securities analysts believe that although value stocks continue to be bought, the historical value factor based on the price-to-book ratio has not been effective in recent years, as investors are more focused on the level of the price-to-book ratio, such as the market reforms of the Tokyo Stock Exchange.

The reforms of the Tokyo Stock Exchange have been one of the important driving factors for Japanese value stocks. Since the reform meeting at the end of 2022, low price-to-book ratio stocks have been favored by the market due to high shareholder return expectations, especially those companies with a price-to-book ratio below 1.

However, Nomura Securities expects that this trend may weaken in the future, and investors need to focus on fundamental analysis rather than relying solely on valuation levels.

Bank of Japan's Policy Remains Key

The research report emphasizes that although the global market environment and U.S. economic trends have a significant impact on the Japanese stock market, the monetary policy of the Bank of Japan remains a key factor determining investors' long-term preferences. In March of this year, as the central bank ended its negative interest rate policy, the yen weakened, further boosting the performance of value stocks.

Nomura believes that if the central bank continues to promote policy normalization, further interest rate hikes or adjustments to quantitative easing policies will maintain the long-term attractiveness of value stocks.

We believe that the interest rate situation in Japan, especially the monetary policy of the Bank of Japan, is the most important driving factor for long-term investor preferences in the Japanese stock market.

Looking ahead to 2025, Nomura Securities believes that export-oriented value stocks will become the market focus in early next year.

These stocks performed poorly in 2024 due to yen appreciation and global economic uncertainty, but as market concerns about the U.S. election results gradually dissipate and exchange rate impacts are gradually digested by the market, these stocks are expected to rebound in early next year.

According to the report data, as of mid-November 2024, the performance of export-oriented value stocks has begun to show signs of recovery. Additionally, the report points out that historical data since 1993 shows that the value factor typically performs better in the first half of each year than in the second half, which also supports the market outlook for early 2025