The Japanese stock market continued to perform strongly in 2024, with the Nikkei 225 index hitting a new high since 1989. Jeremy Osborne, Director of International Japanese Equity Investments at Fidelity, analyzed the investment opportunities in Japanese stocks and the key points investors should pay attention to. In terms of the long-term risks and opportunities in the Japanese market, he believes that the biggest risk facing the Japanese stock market is deflation returning, but Fidelity believes the likelihood of this happening is low. Inflation risk and rising interest rates will impact market valuations, but expected interest rates will gradually rise. Fidelity believes that the Japanese stock market can provide attractive value for investors who are currently underweight in this market. Despite international investors being surprised by the Japanese stock market hitting new highs, factors such as corporate governance reforms and economic normalization in Japan in recent years have continued to drive the Japanese stock market, including the effectiveness of the Tokyo Stock Exchange's encouragement of companies with market-to-book ratios exceeding one. In addition, nearly half of the companies listed on the main board have responded to the Tokyo Stock Exchange by disclosing plans to improve capital efficiency, and the steady earnings of index-weighted stocks and expectations of stock buybacks have boosted investor confidence. Overall economic improvement and moderate inflation are expected to support wages, consumer spending, and investment. Additionally, since the beginning of this year, the major buyers in the Japanese stock market have been overseas investors, with net purchases focused on cash stocks rather than stock futures, reflecting an increase in interest from traditional long-term investors. Japanese companies actively repurchasing stocks are another major buyer. Fidelity points out that the accumulated net purchases of overseas investors are still lower than the peak during the "Abenomics" era in 2015. Even though there has been a resumption in purchases since March 2023, the allocation of Japanese stocks by global active funds remains low, but higher than during the pandemic. Japanese households have a relatively low allocation to stocks compared to American or European households, with Japanese stock investments accounting for only 11% of their overall financial assets. With the expansion of inflation and Japan's tax-free individual savings accounts (NISA) driving financial allocation, Japanese households are expected to increase their allocation to inflation-resistant assets such as stocks. The significant structural underweighting of investors reflects the opportunity for a large influx of funds into the Japanese market. If companies continue to implement policies that benefit shareholders and improve shareholder returns, the trend of inflows of funds is expected to continue. In terms of the external environment, the expected slowdown in the US economy, whether a soft landing or hard landing, will affect the Japanese market, and changes in US interest rates will also affect Japan's exports from a fundamental and monetary perspective. Looking at the Japanese domestic perspective, its economic outlook is expected to remain relatively stable, with input inflation gradually fading and changes in pricing strategies possibly leading to expanding corporate profit margins. Additional shocks that energy prices might bring are potential inflation risks that investors need to closely monitor. In this environment, Fidelity continues to focus on the value investment concept, seeking opportunities for investments with pricing power, increasing profits, and ongoing corporate governance reforms. The shortage of labor supply in Japan will continue to support structural inflationary pressures, and a year of consecutive wage increases may lead to real wage growth, thereby accelerating monetary policy changes and bringing positive medium-term impacts to industries such as consumer products and services. The improvement in corporate governance is strengthening the return on capital, with companies whose trading prices are lower than book values continuing to improve their situation, accelerating the disposal of cross-shareholdings and business restructuring, among other measures. Companies making substantial and lasting changes to their capital allocation policies or basic business structures will continue to provide attractive opportunities for excess returns. From an industry perspective, traditional Japanese industries have the potential to gain more sustainable pricing power. Retailers with sustained cost advantages compared to their industry peers should be able to increase market share in a moderately inflationary environment, while real wage growth remains elusive. At the same time, some construction companies are leveraging the advantages of returning to Japan to improve profitability by focusing on profits rather than quantity and passing on costs to customers. Finally, industries such as factory automation that have been oversold in China are becoming more attractive in terms of risk returns, especially as indicators such as machine orders rebound from their lows.