Summary:
Japan’s startup stocks are facing their longest annual loss streak on record.
The Tokyo Stock Exchange Growth Market 250 Index is down 11% this year.
The Bank of Japan's potential interest rate hike could further impact startup financing.
Many startups are rushing to go public without solid growth strategies.
Despite challenges, there are still attractive investment opportunities in the sector.
Japan's Startup Stocks in Trouble
A gauge of Japan’s startup stocks is heading towards its longest run of annual losses on record, primarily due to the looming threat of higher interest rates. This situation adds to a growing list of concerns that are driving investors away from the sector.
Current Market Trends
The Tokyo Stock Exchange Growth Market 250 Index, previously known as the Mothers Index, has decreased by about 11% this year, marking its fourth consecutive yearly loss—the longest decline since 2000. In contrast, the broader Topix Index has risen by 15%, buoyed by expectations that banks and life insurers will benefit from increased borrowing costs.
Challenges for Startups
The downturn in startup stocks may persist as the Bank of Japan prepares to raise interest rates, which would increase the costs for new companies seeking to finance research and development. Additionally, the recent depreciation of the yen against the dollar has shifted investor focus towards Japan’s exporters, sidelining startups that predominantly rely on domestic revenue.
Structural Issues in the Startup Sector
Startups are also grappling with structural challenges that affect their popularity among investors. Many companies are rushing to go public in a desperate bid for financing, often without a solid long-term growth strategy. According to Naoya Kawai, chief investment officer at Fundnote, IPOs have become a primary route for startups since late-stage investments are scarce.
Investor Sentiment
Ikuo Mitsui, a fund manager at Aizawa Securities Co., notes that many startups prioritize going public over genuine growth, leading to low liquidity, small market value, and poor profitability. The trading volume of the Growth 250 index has dwindled to an 11-year low, with its earnings per share remaining negative since 2019.
Potential in the Startup Landscape
Despite these challenges, not all hope is lost for Japan's startups. Praveen Kumar from Baillie Gifford & Co. highlights that there are opportunities for outperformance in growth stocks with low valuations, suggesting that attractive startups still exist in the market.
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