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Japan's stock market surges to all-time high after 34-year wait

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2024-02-23

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Japan's stock market has climbed past its all-time closing high, surpassing the record level struck during the country’s late-1980s asset bubble after a 34-year wait. The Nikkei share average rose about 2% to close at a record 39,098.68 points, above the previous intraday high of 38,957.44 points touched on the final trading day of 1989. On that day, the benchmark index closed at 38,915.87.

The Nikkei hit an intraday high of 39,156.97 in trading on Thursday.

Reuters pointed out that the 34 years it has taken to regain its footing is a record for a major market and is a decade longer than Wall Street took to recoup losses from the 1929 crash and Great Depression.

For that, we can thank the very strong US dollar for much of the surge in the Nikkei and other measures of Japanese stock market activity and the five-year slide in the value of Chinese markets.

Nikkei and Topix have been standout outperformers in Asia Pacific, up more than 17% in 2024 after surging more than 25% in 2023 — their respective best annual gain in at least a decade. Wall Street is only up around 5% so far this year to Wednesday’s close. Reuters pointed out that the Nikkei's rally has defied a recession in Japan, wars in Europe and the Middle East, the global inflation shock, and a sharp rise in interest rates worldwide. The country’s trade exposure has helped insulate it from deteriorating domestic demand while a weak currency has boosted exporters' earnings.

While many analysts claim that Japanese listed companies are doing well (which many are, like Toyota), the improvements are coming from old-line companies (again like Toyota) and there’s a striking absence of the tech drive seen in the US, especially AI and companies like Nvidia. But there is a fleet of smaller chip-related stocks that have grabbed the eye of foreign investors (who have piled into the Tokyo market as China has slid into insecurity, deflation, and government attacks on foreign and local businesses). Stocks like Screen (up 69% year to date and a Nvidia wannabe), Tokyo Electron (shares up 50% year to date), and Advantest (also up 50% year to date).

By way of contrast, shares in Renesas Electronics Corporation (which has bid $9.1 billion for local/US stock Altium) are only up 0.14% year to date, even though they are a semiconductor maker. US analysts have noticed the bounce, and now Bank of America equity strategists have lifted their 2024 year-end forecasts for the Nikkei 225 to 41,000 from 38,500. They raised their forecasts for the Topix to 2,850 from 2,715.

The key, though, is the weakness of the yen, which has shed about 6% against the dollar so far this year and seems on track to drop to 33-year lows touched late last year. At 150.40 Thursday afternoon, it wasn’t far from that low of 151.95.

Most Japanese companies balance their 2023-24 accounts at the end of next month, and there is a growing feeling that for the third year in a row, corporate earnings could hit a new high.

This comes on the back of record quarterly earnings for the October-December period, which are up 45% from the same period a year earlier and are 14% higher than market forecasts, according to Goldman Sachs analysts.

It’s no coincidence that the three years of strong earnings also saw the yen fall 40% against the US dollar, and Chinese markets drop by around a third in the same time. The weaker yen has injected a dose of inflation into deflation-dominated Japan in the same time. Wages are rising faster than the CPI in some cases, and the Bank of Japan’s ultra-easy monetary policy stance and continuing spending by the central government can’t be ruled out as being very helpful to growth and the markets.

Three years ago, Japan was mired in deep deflation, but thanks to the surge in energy costs (and the rise in food and other commodity prices) since the Russian invasion of Ukraine two years ago, the CPI surged to a multi-year high of 4.3% in January 2023. It has since fallen back to an annual 2.6%, which, while lower, is still well ahead of deflation, as China now finds itself at the consumer and producer price levels.

Thoughtful western analysts also point to corporate governance changes in Japan driving buybacks and unwinding cross-holdings, unlike China where the government led by President Xi Jinping has been cracking down on business, tightening rules on information, and making it tougher for foreign investors (who withdrew more than $US140 billion in 2023).

Foreigners have switched a lot of that money into Japan, investing 6.3 trillion yen ($US42 billion) in the equity market last year. They added a net 1.16 trillion yen (more than $US10 billion) in Japanese shares last month.

And don’t underestimate the impact of Warren Buffett and his high-profile purchases of shares in the country’s five biggest trading houses - Mitsubishi, Mitsui, Itochu, Sumitomo, and Marubeni.

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