The Japanese stock market has barely grown for decades. Now it is thriving Business and economics

The Japanese stock market has barely grown for decades.  Now it is thriving  Business and economics

Kuala Lumpur, Malaysia – For decades, international investors have shunned Japan’s stock market, whose meager gains reflected the country’s protracted economic stagnation.

These days, Japanese stocks are the hottest game in town, with the Nikkei 225 rising to a 34-year high.

After Japan suffered “lost decades” following the collapse of the massive asset bubble of the 1990s, Tokyo’s benchmark index rose last year by 28.2 percent, comfortably outperforming the S&P 500 in the United States.

There are no immediate signs of the buying frenzy slowing down.

In January, the Nikkei 225 rose another 8 percent, as foreign investors bought 956 billion yen ($6.5 billion) worth of Japanese stocks in the space of one week.

Some market analysts believe that 2024 could be the year the Japanese stock market finally surpasses its 1989 peak of 38,915.87.

For Japan, the world’s third-largest economy, this has been an “exciting recovery story,” said Nicholas Smith, a Japan strategist at investment group CLSA.

“Profitability is recovering quickly from low levels. Earnings growth is growing strongly while others are faltering. P/E is relatively low and growth is high,” Smith told Al Jazeera.

“What’s not to like? Companies have begun returning their piles of cash to shareholders.

For foreign investors, a combination of factors has made Japanese companies look more attractive than they have in decades.

Recent corporate governance reforms led by the Tokyo Stock Exchange have led Japanese companies to seek increased shareholder returns through share buybacks and increased dividends.

The weak yen, hovering at its lowest levels since the 1990s, has boosted corporate profits and made Japanese stocks, already cheap by international standards, better valued.

Warren Buffett has invested heavily in the Japanese stock market (File: Bloomberg)

Billionaire investor Warren Buffett, the most prominent supporter of Japanese stocks, cited the “ridiculous price” he was offered for stakes in Japan’s five largest trading companies as a reason he snapped up $6 billion of their shares during the Covid-19 pandemic.

Under Prime Minister Fumio Kishida’s “New Capitalism” campaign, Tokyo has also sought to encourage a shift from saving to investing, relaunching the Nippon Individual Savings Account (NISA) program with higher annual investment limits and extended tax-exempt periods.

There were also signs that Japan’s economy may finally be starting to emerge from its decades-long deflationary spiral, with workers last year seeing their biggest pay rises since the early 1990s.

Expectations that wage growth will continue to rise were the biggest of several drivers of the stock market rally, said Ryota Abe, an economist at the global markets and treasury unit at Sumitomo Mitsui Banking Corporation (SMBC).

“Recent events indicate that what has changed most in society is that business leaders in Japan have begun to think more seriously about the need for steady wage growth given the state of inflation and companies,” Abe told Al Jazeera.

Japanese stocks also benefited from the decline in the fortunes of other markets, especially China.

As the Chinese economy faces challenges ranging from Beijing’s crackdowns on private industry to last year’s slow-moving real estate crisis, foreign investors pulled $29 billion from the Chinese stock market, wiping out 90 percent of inward investment in 2023. .

However, analysts disagree on how long Japanese stocks’ moment in the sun may last.

Martin Schultz, a senior researcher at the Fujitsu Research Institute, said the Japanese stock market has the potential to continue to deliver significant returns as corporate leaders seek to increase productivity and increase returns to shareholders.

“While the upside is limited in a slow-growth economy, leading companies that benefit from long-term trends, such as digitalisation, renewable energy and Asian economic integration, continue to lag behind their peers in valuation,” Schultz told Al Jazeera. “They have room to grow.”

Others see a decline 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 undermine the affordability of Japanese stocks.

Japan’s appeal will fade as business sentiment improves in the United States and Europe in a low interest rate environment, said Taiki Murai, a doctoral researcher at the Economic Policy Institute at the University of Leipzig.

“As a result, international capital flows are likely to leave Japan in search of a higher return,” Murray told Al Jazeera.

The Japanese economy has been stagnant since the collapse of the massive asset bubble in the early 1990s (File: Kiichiro Sato/AP)

There are also differing views on the extent to which the rise in Japanese stocks portends a broad economic recovery.

After promising signs in 2023, wage growth has stalled recently. Structural issues, including a shrinking population and a rigid labor market that has resisted reform, continue to cast a shadow over long-term growth prospects.

CLAS’s Smith expressed optimism about the direction of recent economic trends.

“The government, ministries and shareholders are working together in a way I have never seen before in my 35 years in the country,” he said.

Murray, a researcher at the University of Leipzig, said that 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 delayed comprehensive structural reforms of the Japanese economy. Shinzo Abe, the former prime minister, also included structural reform in his Abenomics economic policy package, but only fiscal and monetary expansions were implemented, he said.

“Furthermore, there has been little to no positive news from the Japanese corporate sector regarding innovation.”

Abe, an economist at Sumitomo Mitsui Banking Corporation, said the outlook for the economy will become clearer after wage negotiations between companies and employees in the spring.

“We have to continue to monitor actual spending as well as the rise in wages in the latter part of this year so that we can see the virtuous cycle between wages and spending in the economy,” Abe said.

“I want to see more changes in the deflationary mentality among the Japanese,” he added. “If that were the case, I would become more confident about rising stock prices.”

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