Prologis: Maintains a positive outlook on the Japanese stock market; short-term market mispricing may present investment opportunities

According to the Zhitong Finance APP, Daniel Hurley, a portfolio expert in equities at T. Rowe Price, maintains a positive outlook on the Japanese stock market but also notes that the factors driving market returns are changing. Japanese stock valuations have undergone a reassessment, and the Japanese market can no longer solely rely on cheap valuations to attract capital. Looking ahead, whether companies can deliver profit growth, improve capital allocation, and enhance corporate governance will be more important than a further expansion of valuation multiples.

Japan's real interest rates remain deeply negative, which is the fundamental reason for the continued weakness of the yen. Government intervention in the foreign exchange market may slow the pace of yen depreciation and reduce short-term volatility, but it is unlikely to sustain a reversal of its trend. However, Japan's policy direction is gradually changing. The Bank of Japan raised its overnight lending rate target to around 1.0% in June. Subsequently, the Bank of Japan kept interest rates unchanged on July 31, but Governor Kazuo Ueda stated after the meeting that the authorities do not want monetary policy to "fall behind the situation" and expect to continue raising policy rates in response to economic and inflation developments.

Therefore, the bank's baseline scenario does not foresee an immediate or one-way surge in the yen, especially given that U.S. Treasury yields remain high. As the interest rate differentials between Japan and other major economies gradually narrow, and Japan's monetary policy no longer significantly deviates from other markets, the yen is more likely to exhibit a gradual and fluctuating appreciation trend. The yen may continue to fluctuate in the short term, but the risk distribution in the market is changing: the Bank of Japan is still in a tightening phase, while the rate hike cycles of most other developed market central banks are nearing their end.

As Japanese companies move more production facilities overseas and retain more profits abroad, the sensitivity of the Tokyo Stock Exchange Price Index (TOPIX) corporate earnings to yen depreciation has structurally declined. Therefore, a moderate appreciation of the yen may actually benefit the overall Japanese market. A stronger yen helps enhance household purchasing power, alleviate imported inflationary pressures, and support local consumption, with market-leading sectors potentially expanding further into retail, food, transportation, and other domestic demand-related enterprises. Meanwhile, the gradual normalization of interest rates continues to favor banks and insurance companies with better fundamental factors.

Japanese semiconductor stocks have recently experienced a significant pullback, but market earnings forecasts for related companies continue to rise. The forecasted price-to-earnings ratio for Japanese semiconductor stocks is currently around 14 to 15 times, lower than the overall TOPIX valuation level, despite their expected earnings growth being much higher than the market. This reflects that the recent adjustments are more likely due to profit-taking, portfolio adjustments, and leveraged investment activities, rather than a significant deterioration in the fundamental factors of the artificial intelligence investment cycle.

Japan remains one of the most attractive markets for investors participating in the development of artificial intelligence infrastructure, with related fields including semiconductor equipment, testing, advanced packaging, materials, power components, factory automation, and data center infrastructure. Unlike some other markets, the constituent stocks of the TOPIX are relatively diversified, allowing investors to participate in these structural growth themes without bearing the concentrated risks of excessive reliance on two or three large stocks.

Investment opportunities in the Japanese stock market are not limited to artificial intelligence; noteworthy areas include: globally competitive semiconductor, industrial, and automation companies; banks and insurance companies benefiting from monetary policy normalization; and local enterprises benefiting from improvements in real wages and a stronger yen Corporate governance reforms and investment opportunities in special situations, including share buybacks, sales of non-core assets, reductions in cross-shareholdings, and changes in management; as well as certain cyclical stocks, whose valuations may reflect a more pessimistic economic downturn scenario than the actual fundamental conditions. The growth policy of the Japanese government prioritizes defense, nuclear energy, artificial intelligence, and semiconductors as key investment areas. The overall policy direction is favorable for growth industries, capital expenditures, and the establishment of strategically significant domestic capacity.

The Japanese stock market remains susceptible to the flow of funds from overseas investors, and the increase in leveraged retail trading may also amplify market adjustments. Therefore, stock price movements may sometimes temporarily deviate from corporate earnings and fundamental factors. For investors who adopt a disciplined, bottom-up stock selection strategy, such volatility can create investment opportunities. Short-term mispricing in the market may occur among large, medium, and small enterprises, presenting opportunities for investors who patiently conduct fundamental research rather than simply chasing index trends