Japan’s prolonged stock market rally faces potential challenges as rising bond yields make fixed-income investments more attractive, according to Katsuya Nakanishi, CEO of Mitsubishi Corporation, the country’s largest trading house. Speaking from Tokyo, Nakanishi emphasized the need for corporate Japan to improve capital efficiency to sustain investor interest amid shifting market dynamics.
The Nikkei 225 index has surged more than 100% over the past 18 months, propelled by strong domestic demand and shareholder-friendly corporate policies. However, this momentum appears vulnerable as Japanese government bond yields reach levels not seen in over three decades. The 10-year bond yield recently climbed to around 3%, marking a significant departure from nearly zero interest rates that prevailed in previous years.
“We’re transitioning from a zero interest rate era to a positive interest rate environment,” Nakanishi remarked. “This presents investors with a direct choice between bonds and equities. Without better capital efficiency, there is a risk to equity valuations.”
Nakanishi’s concerns reflect broader market apprehensions about the consequences of rising bond yields, which have been partly influenced by the fiscal stimulus agendas under Prime Minister Sanae Takaichi. The Nikkei 225 peaked above 30,700 points in June but has experienced volatility since. Market strategists caution that further increases in yields—especially if 10-year rates exceed 3.5%—could trigger a significant correction in Japanese equities.
Shusuke Yamada, chief Japan foreign exchange and rates strategist at Bank of America, noted last month that a notable market downturn could occur if rates climb beyond this threshold, posing risks to the current bull run.
Japanese trading houses, which operate diversified portfolios spanning commodities, retail, and energy sectors, have recently benefited from the investment of Berkshire Hathaway, which has become a major shareholder. This involvement helped narrow the conglomerate discount on their shares, enhancing market valuations.
However, analysts stress that the trading houses must now demonstrate stronger profitability and capital returns to justify their enhanced valuations. Mitsubishi Corporation aims to boost its return on equity (ROE) to over 12% by next year, up from an estimated 11.5% this fiscal year and 8.5% previously, targeting net income around ¥1.2 trillion ($7.5 billion).
To achieve these goals, Mitsubishi is reviewing its portfolio of about 160 underperforming businesses, increasing leverage, and has initiated substantial share buybacks, including a ¥1 trillion program last year.
Nakanishi also underscored the importance of integrating a broad, interdisciplinary approach amid the rise of artificial intelligence, blending data-driven insights with experiential knowledge. He cited Mitsubishi’s efforts to apply climate change learnings from its salmon farming operations to natural gas trading and adapting loyalty systems from its convenience store chain Lawson to enhance customer retention at its European energy subsidiary Eneco.
As Japan’s economic landscape evolves against rising interest rates, corporate Japan’s capacity to deploy capital effectively and innovate across sectors will be critical to maintaining investor confidence and sustaining the stock market rally.