TOKYO -- Japanese shares continue their advance as profit upgrades draw investors' attention away from the prospect of more monetary and fiscal stimulus to surprisingly robust corporate earnings.
The benchmark Nikkei Stock Average soared 408 points, or 1.86%, Wednesday to close at 22,420, staging its biggest one-day gain since May 8, right after Emmanuel Macron won the French presidential election. Wednesday's finish marks the highest since July 1996.
Trading volume on the Tokyo Stock Exchange first section swelled to 3.75 trillion yen ($32.9 billion), making the session the second-most active of the year so far.
The Sony surprise
Claiming the spotlight was Sony's upgrade Tuesday of its full-year operating profit outlook to an all-time high. The electronics group now expects a 630 billion yen profit for the fiscal year ending March 2018, which would mark its first record in 20 years.
Sony's forecast trounces the QUICK Consensus of analyst estimates by roughly 50 billion yen. That feat is being credited to the strong showing by the company's image sensors, used widely in smartphones.
"Sony's expanding profitability in semiconductors is surprising," said Masaru Sugiyama at Goldman Sachs.
The company is notorious for doing the opposite -- issuing downgrades that trigger a broad sell-off in the Tokyo market, a phenomenon dubbed "Sony shock." This time, Sony shares rose as much as 12% to touch the highest level in more than nine years.
"The 'Sony surprise' has turned investor sentiment bullish in one fell swoop," said an executive at a major brokerage.
More good news
Other Nikkei average components raised eyebrows. Chipmaking equipment supplier Tokyo Electron raised its full-year net profit view by 35 billion yen to 198 billion yen. Shares shot up 14% at one point.
Banking on stronger demand for organic light-emitting diode displays for smartphones, Nitto Denko upgraded its profit 28 billion yen to 98 billion yen. Its stock climbed as much as 8%.
Last month, the Nikkei average logged 16 straight sessions of gains, the longest streak in the post-war era. Many assumed that investors would start cashing out their gains once first-half reporting season got into full swing, since positive earnings expectations had been priced in to some extent.
Pretax profit at listed companies is now seen rising 12.9% in the year ending March 2018 based on a Nikkei Inc. analysis of company forecasts as of Wednesday. "I had already thought earnings were solid, but this surpasses that outlook," said Kenji Abe at Okasan Securities, echoing a view held by many market observers.
The Nikkei average is now trading at 15.24 times forward earnings, reflecting the upgraded forecasts. Compared with other major equity markets -- U.S. stocks' earnings multiple hovers around 20 -- Japanese shares do not appear overvalued.
Eyes on fundamentals
Meanwhile, electronic parts supplier Murata Manufacturing and Mitsubishi Heavy Industries sold off Wednesday following earnings downgrades the day before. This reinforces the view that investors are rewarding companies that outperform while shunning those that do not.
The bull run starting last month hinged heavily on the prospect of fresh government stimulus as well as continued ultraloose monetary policy by the Bank of Japan. Expectations that the BOJ will stay the course have helped the Japanese currency weaken to around 114 yen per dollar, raising hopes for improved earnings at export-heavy companies.
But it has become clear that corporate earnings are now driving the rally. "Investors that been short Japanese stocks have found themselves unable to fight this rally and are being forced to unwind," said Ryoma Sugihara at Societe Generale Securities.
One global equities manager at a Japanese asset management firm has already increased its weighting of domestic stocks in mid-October and is considering going even higher. "Japanese corporate earnings have the potential to grow further," said the source.
Some of the more bullish market watchers see the Nikkei average topping 23,000 by the end of the year.