Japanese equities have outperformed, but is the rally at risk?

investmentnews.com:

Japanese shares need to jump five large hurdles in early 2024 to build on their mighty rally this year.

That’s the view of analysts who see the nation’s equities indexes struggling over the next few months against a stronger yen, weak consumer spending, too many investors chasing a narrow range of stocks, competition from overseas share markets and political instability at home.

Nomura Holdings Inc. chief strategist Naka Matsuzawa expects Japan’s equities to drop around 5% over the next six months, while analysts at JPMorgan Chase & Co. and Saxo Markets see stock gains slowing to around 5% to 10% next year, after a more than 20% jump in benchmark indexes in 2023.

“This rally could be fragile in the next three months,” said Kelvin Leung, a portfolio manager at Robeco Hong Kong Ltd. “It may also be reasonable to assume some more share price volatility,” given that demand may prove to be fickle from some inexperienced investors that bought into the Japan rally, he said. 

Most observers see a different picture by midyear, with the Nikkei 225 index projected to trade at fresh three-decade highs at that time, according to a Bloomberg survey. 

Japan’s benchmark Topix rose 0.7% to 2,349.38 on Thursday, still about 3% below its September peak. The Nikkei 225 Index is hovering just below a 33-year high after the Bank of Japan’s decision a day earlier to keep the world’s last negative interest rate on hold. 

These are five key negative factors that will keep investors nervous in the coming months: 

The yen weakness that has been a tailwind for Japanese equities may be coming to an end, which would mean an adjustment period for stocks. The yen has jumped about 6% since it touched this year’s low against the dollar in November and