Nikkei 225 Touches 30,000 as Reshuffle Extends Japan Stock Gains

(Bloomberg) — The Nikkei 225 Stock Average touched a level above 30,000 for the first time since April as a reshuffle of the blue-chip gauge added to a wave of positive sentiment on Japanese equities.

SoftBank Group Corp. and Tokyo Electron Ltd. were the largest contributors to a 0.9% climb in the Nikkei 225, which closed at 29,916.14. Electronics makers gave the biggest boost to the broader Topix, which advanced 1.1%. Both measures capped their seventh-straight day of gains, pushing the Nikkei 225’s gain for the year to 9%, lagging the the 14% rise in the Topix.

The revamp of the Nikkei 225 — which will add videogame giant Nintendo Co. and major technology companies Keyence Corp. and Murata Manufacturing Co. — comes amid an upsurge of interest in Japanese equities. The announcement last week that Prime Minister Yoshihide Suga will step down has sparked optimism for new policies to spur the economy.

“In the short term, Japanese stocks may appear overbought, but foreign investors have low weightings in Japan and will continue to buy stocks that have been lagging behind,” said Ryuta Otsuka, a strategist at Toyo Securities Co. While there may be some profit-taking with the Nikkei reaching 30,000, investors will continue to look for thematic plays related to Suga’s succession, he added.

Keyence and Murata jumped around 5% each on Tuesday, while Nintendo, whose addition to the Nikkei 225 had been widely expected, closed 1% higher. Among the stocks being deleted, Nisshinbo Holdings Inc. and Toyo Seikan Group Holdings slid more than 10%, while Sky Perfect JSAT Holdings Inc. swung from a loss to a gain.

Nikkei May Eye 36,000 or Return to Market Malaise After Suga

The Nikkei’s latest annual review followed rule changes earlier this year that made it easier for the price-weighted gauge to include shares with high prices. Analysts noted that given the large sizes of the three new additions, the remaining Nikkei stocks may need to be sold down to make room, although this was known well in advance.

“Market participants have been pricing the inclusion changes,” Seiichi Suzuki, a market analyst at Tokai Tokyo Research Institute Co., said after the changes were announced. “It’s possible they will now see the news as being ‘done and dusted’, and it’s possible they’ll buy back the Nikkei 225.”

The Nikkei’s underperformance versus the Topix in 2021 has also been linked to the latter’s higher weighting of economically sensitive stocks amid a global focus on cyclical recovery. Another factor cited is the decision in March by the Bank of Japan to stop purchasing exchange-traded funds tracking the blue-chip measure, though the central bank hasn’t purchased any ETFs at all since June.

Rekindling the interest of foreign investors may be the key factor for Japan’s blue chips, and bulls see the pending leadership change as a big draw. While the Nikkei 225 dipped back below 30,000 on Tuesday, some analysts have already been eying levels as high as 36,000 by year-end if the next prime minister can help Japan move past the pandemic.

“Funding flows both year-to-date and for the past three months show net selling by foreign investors as a key factor behind the market’s slump,” Ryota Sakagami,  chief Japan equity strategist at the brokerage, wrote in a note dated Monday. “However, foreign investors have historically tended to become net buyers of Japanese equities around a general election.”

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