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Japan’s benchmark Nikkei 225 index soared Thursday, surpassing the record set in 1989 before the financial bubble burst, ushering in an era of sluggish growth.
The index rose 2.2% to close Thursday at 39,098.68. The previous record he set on December 29, 1989 was 38,915.87. That means we’re back to where we were 34 years ago.
That was more than a generation ago, at the height of Japan’s postwar economic boom. But this time the economy is in recession and no one is talking about a bubble. Preliminary figures for exports, manufacturing, services and other indicators released on Thursday suggested continued weakness.
The market sank after reaching its peak in 1989 as banks wrote off about 100 trillion yen of bad loans. The stock price remained well below record for years, at one point dropping below 7,000 yen until a series of market stimulus measures advocated by the late Prime Minister Shinzo Abe in 2013 began to boost the stock price.
The market has soared in recent months, buoyed by strong interest from foreign investors, who account for the bulk of trading volume on the Tokyo exchange.
Big buying in computer chip stocks helped fuel Thursday’s rally after the U.S. market closed, after Nvidia said its revenue more than tripled from a year earlier thanks to an artificial intelligence frenzy. Tokyo Electron’s stock price rose 6%, Advantest’s stock rose 7.5%, and SoftBank Group’s stock rose 5.1%.
Unlike the U.S., where stock prices have hit record highs on expectations that the Federal Reserve will start cutting high interest rates once it deems inflation truly under control, Japan’s benchmark interest rate has been set at 10 years. Over the above period, it has remained at -0.1%.
The Bank of Japan is still using easy monetary policy to spur inflation and boost growth, and much of the money it pumps into the economy is flowing into the stock market.
At the same time, many global investors are shifting their portfolios away from China due to the slowing Chinese economy and rising tensions between the United States and China.
Tokyo stock prices have risen 15% in the past three months and about 44% in the past year. In Shanghai, prices are down more than 11% compared to a year ago, and Hong Kong’s Hang Seng Index is down about 22%.
Record increases in Japanese corporate profits and improvements in corporate governance have made Japanese stocks more attractive.
“I think investors are watching closely as Japanese companies are showing signs of change,” Japan Exchange Group CEO Hiromi Yamaji said in an online interview hosted by the Financial Times on Wednesday. This was stated at the briefing.
He pointed out that while many older Japanese are reluctant to invest in stocks due to the trauma of losing their savings when the bubble burst in the early 1990s, younger investors are less cautious.
“The generation is changing,” Yamaji said.
Changes to Japan’s Individual Savings Account Program (accounts that offer tax-free profits) that took effect in January are also attracting investors who want to leverage higher returns on stocks, but analysts say much of that money is He says that it is flowing into overseas markets.
Still, even a small amount of the 1.5 trillion yen (approximately $7 trillion) in savings held by Japanese households can have a big impact.
Additionally, the Independent Administrative Pension Investment Fund, one of the world’s largest institutional investors, is increasing its investment in stocks, contributing to the rise in prices.
A year ago it was about 140 yen, but the weaker yen is now trading at about 150 yen against the dollar, and overseas investors are rushing to find bargains.
According to the Tokyo Stock Exchange, foreign investors bought 125.2 trillion yen in Japanese stocks in January, double the amount from the previous year. As in the US, the biggest winners have been technology companies.
So far, experts say Japanese stocks are not overvalued.
Tokyo’s price-to-earnings ratio is about 16 times, compared to 23 times for the S&P 500, 24 times for India’s Sensex, and 8 times for Shanghai. According to the Nikkei Shimbun website, investors in Tokyo stocks received a return of more than 28% in 2023.
Meanwhile, a completely different scenario is unfolding in China. China’s market has not fully recovered from the 2015 meltdown that wiped out trillions of dollars in value.
Markets in Hong Kong and mainland China have been dampened by tensions between China and the United States, forcing companies to think more carefully about where they invest.
The Nikkei Shimbun’s new record was welcomed with applause in some Tokyo securities firms, but there was no sense of elation like there was in 1989. At that time, seven of the world’s top 10 companies by market capitalization were Japanese companies. Now, none of that is the case.
Izumi Desvalier, head of Japan economics at BoA Securities in Tokyo, told the FT that much of the improvement in Japanese companies’ profits is coming from overseas, which sources more than 40% of their profits.
“The stock market is not the economy,” she said.
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