(Bloomberg) -- Japanese shares outperformed regional peers on Wednesday with the broad Topix index climbing to the highest in 34 years, as the weaker yen and falling bond yields fueled bullish investor sentiment.

The Topix joined the ascent of the Nikkei 225, which reached its highest since 1990 on Tuesday. The Nikkei extended its gains to 2% on Wednesday. The Topix, which some funds prefer to follow because it’s more comprehensive, rose 1.3% to close at 2444.48 in Tokyo, reaching a level last seen in March 1990. 

The jump in the Nikkei and Topix suggests that investor optimism toward Japanese shares remains strong this year after both gauges advanced more than 25% in 2023 to mark their best performance in a decade. The measures were among the world’s biggest gainers last year as authorities pushed companies to improve shareholder value, decades-long deflation faded, and a weak yen supported exporter earnings.

“We think Japan markets could continue to remain attractive for now, although the returns may not be as strong as those in 2023,” said Charu Chanana, market strategist for Saxo Capital Markets Pte.

Potential headwinds for Japanese equities this year include expectations of the Bank of Japan tweaking its super-easy monetary policy and possible yen appreciation, Chanana said. But “both seem to be delayed,” after a strong earthquake on Jan. 1 and weak economic data, as well as uncertainties about the Federal Reserve’s interest rate-cut outlook, she said.

The electric appliances sector, which includes Sony Group Corp. and Keyence Corp., was the biggest contributor to gains in the Topix index. The yen slid for a second day, by 0.2%, to 144.83 against the dollar as Japan’s benchmark 10-year bond yield slipped 0.5 basis point to 0.58%.  

Past investors in China and Taiwan may also be turning to Japan as geopolitics, regulatory uncertainties and concerns about the economic outlook in China remain in focus. Taiwan elections are set to take place on Jan. 13, with investors eyeing how the vote affects cross-strait relations.” 

“I feel that funds are fleeing to Japan,” said Shingo Ide, chief equity strategist at NLI Research Institute. “One of the reasons for this may be the yen’s depreciation, but I think it may be that funds are taking flight from China and Taiwan.”

Weak Wages

Wage data for Japanese workers showing a sharp slowdown in growth in November may bolster the case for the BOJ to stand pat on policy this month. Nominal cash earnings for workers rose 0.2% from the previous year, decelerating from a 1.5% increase in October, according to data released Wednesday.

“The market is rising on the back of only good aspects of everything: lower inflation and lower rates but still resilient economies and stable FX,” said Nomura Holdings Inc. chief strategist Naka Matsuzawa. “Perhaps it’s too good to be sustainable.”

More central bank watchers have joined those pushing back their predictions for the end of negative rates in Japan this month. 

“The earthquake on Jan. 1 reinforced the view that the BOJ will not normalize its monetary policy or remove negative interest rates in January,” said Hitoshi Asaoka, a strategist at Asset Management One Co. 

ADVANCERS

  • AWA Paper (3896) +17%
  • Sanki Service (6044) +13%
  • Komatsu Matere (3580) +7.6%

DECLINERS

  • Namura Ship (7014) -19%; Namura Ship Drops Most in 14 Months; Trading Volume Triples
  • Land Co (8918) -13%
  • Nextage (3186) -11%

INSIGHTS

  • 27 of the 33 sector indexes on the Tokyo Stock Exchange advanced; Tokyo Stock Exchange TOPIX Precision Instruments Index was the best performer, while Tokyo Stock Exchange TOPIX Marine Transportation Index fell the most
  • The MSCI AC Asia Pacific Index was unchanged
  • Topix Index is up 30% over the last year, vs. MSCI AC Asia Pacific Index up 2.3%
  • Topix Index members are trading at 14.5 times their estimated earnings for the next 12 months

RELATED NEWS

  • Japan Shares Beat Asia Peers With Indexes Hitting 34-Year Highs
  • Japan’s Slower Wage Growth Adds to Reasons for BOJ to Hold
  • JAPAN REACT: Base Pay Growth at 1990s Pace Is Good News for BOJ
  • Nikkei Hits Highest Since Early 1990s in Sign Deflation Ending
  • Nikkei Closes at 34-Year High, Led by Revival in Tech Shares

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This story was produced with the assistance of Bloomberg Automation.

--With assistance from Naoto Hosoda.

(Adds in further information throughout and closing prices.)

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