Feb 23 2024: Japanese stocks surged to unprecedented heights on Thursday, surpassing levels not witnessed since the heady days of the 1989 bubble economy, as attractive valuations and corporate reforms entice foreign investors seeking alternatives to turbulent Chinese markets. The Nikkei share average soared to a peak of 39,156.97 points, surpassing the previous intraday record of 38,957.44 points set in 1989. While the benchmark index closed at 38,915.87 points on the final trading day of 1989, it concluded Thursday’s trading session 2.19% higher at 39,098.68 points. Remarkably, it took 34 years for the Nikkei to reclaim its former glory, setting a record for the longest recovery period among major markets, surpassing even the Wall Street recovery from the 1929 crash and Great Depression by a decade.
Tsutomu Yamada, senior market analyst at Au Kabucom Securities in Tokyo, remarked, “For us traders, this marks the arrival of a new era. It feels like the stock market is telling us that we’ve finally escaped from deflation and a new world has opened up.”
The index has surged nearly 17% this year, following a remarkable 28% surge in 2023, solidifying its position as the best-performing major bourse in Asia. In comparison, the tech-heavy Nasdaq rose 43% in 2023 and is up 6% in 2024 thus far.
The milestone moment elicited a spirited response from traders at brokerage Nomura’s Tokyo trading floor, with some rising to their feet and offering muted cheers as the Nikkei surpassed its 1989 high. This enthusiasm was further evident during the morning session when the benchmark index exceeded its previous all-time closing high, prompting animated cheers and prolonged applause.
Despite facing challenges such as a recession in Japan, geopolitical tensions, and global economic uncertainties, the Nikkei’s rally has persisted. Trade exposure has shielded it from domestic demand challenges, while a weakened currency has bolstered exporters’ earnings.
The market’s resurgence also signifies a definitive end to decades of lackluster performance that previously deterred global investors. Richard Kaye, a Japan-based portfolio manager at Comgest, noted, “It is hard to overstate the psychological impact on Japanese people of the Nikkei returning, since a generation has never seen that level.”
Foreign investors have played a significant role in driving the rally, attracted by attractive valuations and corporate governance changes. Warren Buffett’s substantial investment in 2020 spotlighted Japan’s potential, further fueling foreign interest. Last year, foreign investors injected 6.3 trillion yen ($42 billion) into the equity market, with a net investment of 1.16 trillion yen in Japanese equities in January alone.
A robust earnings season, a depreciating yen, and expectations of continued ultra-easy monetary policy from the Bank of Japan have further energized the market in 2024.
Bank of America’s Asia fund manager survey for February reflects unwavering optimism about Japan, with nearly one-third of participants anticipating double-digit returns from the stock market in the next 12 months. The survey identifies Japan as the favorite market in the region, with fund managers showing a preference for semiconductor and bank stocks.
While analysts have revised year-end forecasts upward, indicating bullish sentiment, fluctuations in the derivative market suggest potential short-term volatility.
The Nikkei’s resurgence evokes memories of the 1980s boom era, albeit with a more tempered outlook and no imminent signs of crisis. With corporate earnings thriving and valuations remaining reasonable, the current market climate contrasts starkly with the speculative frenzy of the past.
Junichi Inoue, head of Japanese equities at Janus Henderson, remarked, “It was extremely expensive in ’89/90. It is still reasonable this time.”
Japan’s market resilience has been further buoyed by corporate reforms and a favorable performance trajectory, particularly against the backdrop of China’s market downturn. As the Nikkei continues its upward trajectory, investors are increasingly optimistic about the market’s prospects, with many foreseeing further gains ahead.