Japan’s benchmark Nikkei 225 index has reached a new milestone, surpassing its previous record set in 1989 before the country’s financial bubble burst. This achievement marks a significant moment for the Japanese economy, bringing back memories of the post-war boom but under vastly different circumstances.
The Nikkei’s Rise: A New Chapter?
The Nikkei closed at 39,098.68 on Thursday, surpassing its previous high of 38,915.87 set on December 29, 1989. This return to its 1989 peak after 34 years is a testament to the resilience of the Japanese market. However, the current economic landscape is vastly different from the heady days of the bubble era.
While the market is experiencing a surge, concerns remain about the economy’s health. Preliminary data released on Thursday revealed a continued weakening in key economic indicators, including exports, manufacturing, and services. This raises questions about the sustainability of the market’s recent gains.
The Rise of Foreign Investors and Technological Advancements
The market’s surge in recent months can be attributed to strong interest from foreign investors, who account for the majority of trading volume on the Tokyo exchange. This interest has been fueled by several factors, including record gains in corporate earnings for Japanese companies and improved corporate governance.
The tech sector, particularly computer chip-related companies, has been a key driver of the market’s rise. Companies like Tokyo Electron, Advantest Corp., and SoftBank Group Corp. have seen significant share price increases following the booming demand for artificial intelligence (AI) technology.
A Different Approach to Monetary Policy
Unlike in the US, where the Federal Reserve is expected to ease monetary policy once inflation is under control, Japan’s benchmark interest rate has remained at minus 0.1% for over a decade. The Bank of Japan (BOJ) is still using easy money policies to stimulate inflation and economic growth. The BOJ’s actions have contributed to the influx of money into the stock market.
The Global Shift: From China to Japan
As China’s economy slows, many global investors are shifting their portfolios away from the Chinese market and toward Japan. The Japanese yen’s weakness against the US dollar has also attracted foreign investors seeking bargains. In January alone, international investors bought 125.2 trillion yen worth of Japanese stocks, double the amount purchased a year earlier.
A New Generation of Investors
The current market rise is attracting a new generation of Japanese investors, less wary of the stock market than their older counterparts who were traumatized by the 1990s bubble burst. The Nippon Individual Savings Account program, which offers tax-free gains, has also lured investors eager for higher returns.
A Cautious Optimism
While the Nikkei’s new record is a positive sign, experts caution against excessive optimism. The market’s current performance doesn’t necessarily reflect the broader economy’s health. The Nikkei’s price-to-earnings ratio remains relatively low compared to other major markets, suggesting that Japanese shares are not overpriced.
However, it’s important to remember that the stock market is not the economy. While the Nikkei’s new peak reflects a positive shift in sentiment, the overall economic outlook remains uncertain. The Japanese economy faces challenges, including weakening domestic demand and an aging population.
Only time will tell whether this new era for the Nikkei signals a sustained recovery for the Japanese economy or merely a temporary reprieve.
