Japan’s stock market barely grew for decades. Now it’s booming
Japan’s Nikkei is at a 34-high as a cheap yen and corporate governance reforms lure international investors.
Kuala Lumpur, Malaysia – For decades, international investors shunned Japan’s stock market, whose meagre gains mirrored the country’s protracted economic stagnation.
These days, Japanese stocks are the hottest game in town as the Nikkei 225 index rides a 34-year high.
After limping through Japan’s “lost decades” following the collapse of a massive asset bubble in the 1990s, Tokyo’s benchmark index last year gained 28.2 percent, comfortably beating the S&P 500 in the United States.
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There are no immediate signs of the buying frenzy slowing down.
In January, the Nikkei 225 climbed a further 8 percent, with foreign investors buying a net 956 billion yen ($6.5bn) of Japanese stocks in the span of a single week.
Some market analysts believe that 2024 could be the year the Japanese stock market finally tops its 1989 peak of 38,915.87.
For Japan, the world’s third-largest economy, it has been a “dramatic recovery story”, said Nicholas Smith, Japan strategist at investment group CLSA.
“Profitability is recovering rapidly from depressed levels. Profit growth is growing strongly while others are stumbling. Price/earnings is relatively low and growth is high,” Smith told Al Jazeera.
“What’s not to like? Companies are starting to return their cash piles to shareholders.”
For foreign investors, a confluence of factors has made Japanese firms appear more attractive than they have in decades.
Recent corporate governance reforms driven by the Tokyo Stock Exchange have led Japanese companies to seek to increase shareholder returns through share buybacks and higher dividend payouts.
A weak yen, hovering at its lowest levels since the 1990s, has boosted corporate profits and made Japanese stocks, already cheap by international standards, even better value.
Under Prime Minister Fumio Kishida’s “new capitalism” drive, Tokyo has also sought to encourage a shift from saving towards investing, relaunching its Nippon Individual Savings Account (NISA) programme with higher annual investment limits and extended tax-exemption periods.
There have also been signs that the Japanese economy may at last be starting to emerge from its decades-long deflationary spiral, with workers last year seeing their biggest wage increases since the early 1990s.
Ryota Abe, an economist at the global markets and treasury unit of Sumitomo Mitsui Banking Corporation (SMBC), said expectations that wage growth will continue to pick up has been the biggest of several drivers of the stock market rally.
“Recent events are suggesting that what has changed in the society the most is that business leaders in Japan have started contemplating more seriously the need for constant wage growth given the inflation situation and corporates,” Abe told Al Jazeera.
Japanese stocks have also benefitted from the lagging fortunes of other markets, particularly China.
As China’s economy grappled with challenges ranging from Beijing’s crackdowns on private industry to a slow-moving real estate crisis last year, foreign investors pulled $29bn out of the Chinese stock market, erasing 90 percent of inward investment in 2023.
Still, analysts differ on how long Japanese stocks’ moment in the sun might last.
Martin Schulz, a senior researcher with the Fujitsu Research Institute, said Japan’s stock market has the potential to keep delivering big returns as corporate leaders push for greater productivity and higher payouts to shareholders.
“While the upside is limited in a slow growth economy, leading companies that gain from long-term trends, such as digitalisation, renewable energy, Asian economic integration, are still lagging their peers in valuation,” Schulz told Al Jazeera. “They have room to grow.”
Others see a comedown on the horizon.
The yen is expected to rise significantly against the dollar this year as the US Federal Reserve begins cutting interest rates, which would undercut the affordability of Japanese stocks.
Taiki Murai, a doctoral researcher at the Institute for Economic Policy at Leipzig University, said Japan’s attractiveness will fade as business sentiment in the United States and Europe improves in a lower interest rate environment.
“As a result, international capital flows would likely leave Japan in search of higher yield,” Murai told Al Jazeera.
There are also differing views about the extent to which Japan’s stock rally foreshadows a broad-based economic revival.After promising signs in 2023, wage growth has recently stalled. Structural issues, including a shrinking population and a rigid labour market that has resisted reform, continue to cloud the long-term outlook for growth.
Smith of CLAS expressed optimism about the direction of recent economic trends.
“Government, the ministries and shareholders are working together in a way I have never seen before in my 35 years in the country,” he said.
Murai, the researcher at Leipzig University, said the strong performance of the stock market does not remove the serious challenges facing the Japanese economy.
“Prime Minister Fumio Kishida’s new capitalism has postponed comprehensive structural reforms of the Japanese economy. Shinzo Abe, former prime minister, had also included a structural reform in his economic policy package ‘Abenomics’, but only fiscal and monetary expansions were implemented,” he said.
“Moreover, there has been little or no positive news from the Japanese corporate sector regarding innovation.”
Abe, the economist at the Sumitomo Mitsui Banking Corporation, said the outlook for the economy will become clearer after wage negotiations between firms and employees in the spring.
“We have to continue keeping an eye on the actual expenditure as well as wages rise in the later part of this year for us to be able to see the virtuous cycle between wages and expenditure in the economy,” Abe said.
“I want to see more changes in the deflationary mindset among the Japanese,” he added. “If this is the case, I will become more confident about higher stock prices.”