Japanese stocks, fueled by attractive valuations, corporate reforms, and a shift in foreign investment away from volatile Chinese markets, have reached unprecedented heights. The Nikkei share average (.N225) touched an all-time intraday high of 39,156.97 points on Thursday, surpassing the previous peak set in 1989 during Japan’s infamous economic bubble.
This milestone marks a record 34-year recovery period for a major market, a decade longer than the Wall Street rebound following the 1929 crash. The Nikkei’s recent surge, with gains exceeding 17% in 2024 and 28% in 2023, has defied global headwinds, demonstrating the potential resurgence of Japanese equities and the nation’s economy.
A Turning Point for Japanese Investors
“This is a monumental shift in sentiment,” observes Richard Kaye, a Japan-based portfolio manager at Comgest. “A generation of Japanese investors has never experienced these levels. This could potentially unlock significant domestic liquidity and propel the market further.”
The enthusiastic reaction across trading floors highlights the significance of this breakthrough. Traders at Nomura’s Tokyo floor erupted in applause as the Nikkei broke the 1989 record, signaling renewed investor confidence.
The Factors Behind the Nikkei’s Rally
While memories of the 1989 bubble collapse linger, analysts emphasize fundamental differences driving the current rally. A weak yen, boosting exporter earnings, combined with robust corporate governance reforms and attractive valuations, have lured foreign investors. In 2023, foreign investors poured a massive 6.3 trillion yen ($42 billion) into the Japanese equity market.
“Japan’s earnings season has been strong, and the ongoing depreciation of the yen is a further tailwind. With an expectation of sustained easy monetary policy, the Nikkei’s rally seems justified,” notes Chihiro Ota, general manager for investment research and investor services at SMBC Nikko Securities.
Bank of America’s Asia fund manager survey reflects this optimism, with nearly one-third of participants projecting double-digit returns from Japan’s stock market over the next year.
Diverging Paths: Japan vs. China
The Nikkei’s remarkable performance starkly contrasts with the struggles of its Asian peers. While Hong Kong’s Hang Seng and China’s CSI300 indices have languished, Japan has outperformed, attracting investment flows seeking stability amid global uncertainty.
Is the Rally Sustainable?
While analysts are generally optimistic, some caution that short-term momentum could be interrupted. Additionally, a sudden reversal in the yen’s value could pose risks.
Junichi Inoue, head of Japanese equities at Janus Henderson, sees the Nikkei’s current valuation as reasonable compared to the inflated levels of the bubble era. He remains bullish on the market’s long-term prospects. Others, like Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, predict the Nikkei will soon reach the 40,000-yen mark.
The Road Ahead
The Nikkei’s record-breaking rally underscores a turning point for Japanese equities. Corporate reforms, including share buybacks and a focus on capital efficiency, bolster fundamentals. This, combined with pent-up domestic liquidity, could support continued growth.
Despite lingering concerns about currency fluctuations and a potential slowdown, the Nikkei’s ascent marks a potential shift in global investor sentiment. Should this momentum continue, Japan’s stock market may finally shed its post-bubble stigma and usher in a new era of sustained growth.
