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Since Japan’s stock market implosion in the early 1990s, the nation has birthed a new phenomenon often called a “zombie economy.” Because these companies failed to cover their debt with an operating income, and Japan’s banks refused to accept losses, the system became reliant on the Bank of Japan (BoJ) and its yield curve control (YCC).

The central bank kept interest rates ultra-low to sustain this model and lowered it into the negative zone (-0.10%) since 2016. A turning point is now ahead. The Bank of Japan is expected to end its negative interest rate policy in April, based on insider sources relayed to Reuters.

This is despite Japan entering recession last week, following contracted gross domestic product (GDP) for two consecutive quarters, shrinking by 3.3% in the prior quarter (Q3) and unexpectedly by 0.4% in Q4 ‘23. However, the BoJ’s new Governor, Kazuo Ueda, appointed in April 2023, stated it is worthwhile on balance because YCC causes heavy market distortion.

“When we can foresee inflation sustainably and stably meeting our 2% target, we will abandon yield curve control and then move towards shrinking the bank’s balance sheet.”

BoJ Governor Kazuo Ueda in May 2023

As of December, Japan’s inflation rate is 2.60%, a third consecutive decline since October’s 3.3%. For investors, this means opening the speculation floodgates. Japan’s Nikkei 225 Stock Average (NIKKEI) is already up 7.32% over the month, compared to the S&P 500 (SPX) at 3.78%.

Japan’s corporate governance reform additionally incentivizes investors. The Tokyo Stock Exchange (TSE) is driving this rally by having companies increase their price-to-book (P/B) ratio. In practical terms, companies are rushing to increase stock buybacks and dividend payouts to return shareholder value.

Here are three Japanese stocks that could benefit further from investor inflows.

Toyota Motor Corporation (NYSE: TM)

Unlike Tesla (NASDAQ: TSLA), which is down -16% over the last three months, TM is up 25%. While Toyota has a forecasted price-to-earnings growth rate in 2024 of 68.3, Tesla has a negative 1.73. Less speculative and more entrenched as a car company, Toyota made the right call to focus on more affordable hybrids that are far less likely to stall in winter conditions.

Despite this approach, Toyota plans to invest around $28 billion in EVs by 2030. In February, Toyota delivered its Q3 FY24 earnings. Over the last five years, Toyota increased its total liabilities by 19% to $359.5 billion. Year-over-year, the company increased sales by 23% and net income by 105%.

Toyota’s dividend yield is now 2.13%, with a $5 annual payout per share. Based on eight analyst inputs pulled by Nasdaq, TM stock is a “buy.” The average TM price target 12 months ahead is $213.16 vs the current $234. This suggests likely price correction after ongoing momentum, likely in the second half of 2024 when the Federal Reserve is expected to cut rates.

Mitsubishi UFJ Financial Group, Inc. (NYSE: MUFG)

If any sector is to benefit from Japan’s exit from negative to positive interest rates, it’s the banking sector. With a wider interest rate spread on the horizon, banks can earn more by charging interest on loans, offset by the amount they pay on deposits.

As Japan’s largest bank, MUFG is estimated to have $2.9 trillion AuM. The bank’s MUFG shares increased 17% over the last three months. Mitsubishi UFJ has a forecasted price-to-earnings (P/E) growth rate of 138.24 in 2024 compared to 29.24 in 2023.

Based on WSJ analyst ratings, MUFG stock is a “ buy.” The average MUFG price target is $10.54 vs current $9.99. The high estimate is $11.82, while the low forecast is $7.43. Investors should consider MUFG stock as one of the safer yet cheaper exposures to Japan’s shifting monetary policy.

Sony Group Corporation (Nasdaq: SONY – American Depositary Shares (ADS))

The Japanese staple electronics and entertainment giant released its latest Q3 FY23 earnings report on February 14th. Sony generated 22% more sales year-over-year, increasing operating cash flow by 226%. However, the company implemented a 5% downward sales revision for the FY2023 forecast, mainly from the decrease in hardware sales.

Accordingly, SONY stock broke even in the last three months, having gained half a percentage point. Nonetheless, 12 months ahead, nine analyst inputs pulled by Nasdaq place SONY stock as a “strong buy.” The average SONY price target is $107 vs the current $88 per share.

Although Sony’s forecasted P/E growth rate is negative 2.5, it is expected to rebound to 14.34 the following year. This makes SONY ADS share a buy on the weakness proposition. 

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