Japan’s benchmark Nikkei 225 index surged Thursday past the record it set in 1989 before its financial bubble burst, ushering in an era of faltering growth.
The index closed Thursday at 39,098.68, up 2.2 per cent. Its previous record was 38,915.87, set on Dec. 29, 1989. So now it is back to where it was 34 years ago.
That was more than a generation ago at the height of Japan’s postwar boom. But this time around, the economy is in recession and nobody’s talking about a bubble. Preliminary measures of exports, manufacturing, services and other indicators released Thursday suggested continued weakening.
The market sank after hitting its 1989 peak, as banks wrote off some 100 trillion yen in bad debts. Share prices remained well below the record for many years – dipping below 7,000 at one point before a series of market-boosting measures championed by the late Prime Minister Shinzo Abe in 2013 began nudging them higher.
The market has logged sharp gains in recent months, helped by strong interest from foreign investors who account for the majority of trading volume on the Tokyo exchange.
Unlike in the United States, where shares have been topping records on hopes the Federal Reserve will begin cutting high interest rates once it decides inflation is truly under control, in Japan the benchmark rate has remained at minus 0.1 per cent for over a decade.
The Bank of Japan is still using its easy money policies to spur inflation and push growth higher, and plenty of the money it has pumped into the economy has found its way into the stock market.
At the same time, many global investors have been shifting their portfolios away from China as its economy slows and tensions flare between Washington and Beijing.
Share prices in Tokyo have risen 15 per cent in the past three months and about 44 per cent in the past year. In Shanghai, prices have fallen more than 11 per cent from a year ago, while Hong Kong’s Hang Seng index is down about 22 per cent.
Record gains in corporate earnings for Japanese companies and improved corporate governance have enhanced the appeal of shares in Japanese companies.
“As Japanese companies show signs of change I think investors are taking a closer look,” Hiromi Yamaji, group CEO of the Japan Exchange Group, said in an online briefing Wednesday sponsored by The Financial Times.
He noted that while many older Japanese are reluctant to invest in shares after the trauma of losing their savings when the bubble burst in the early 1990s, younger investors are less wary.
“The generation is changing,” Mr. Yamaji said.
A change to the Nippon Individual Savings Account program – accounts that offer tax-free gains – that took effect in January has also lured investors eager to tap higher returns into shares, although analysts say much of that money has gone into foreign markets.
Still, even a sliver of the 1.05-quadrillion yen (nearly US$7-trillion) in savings held by Japanese families has a big impact.
Also, the Government Pension Investment Fund, one of the world’s biggest institutional investors, has been ramping up its investments in stocks, helping to push prices higher.
Foreign investors have plunged in, seeking bargains to be had given the yen’s weakness against the U.S. dollar, which is trading at about 150 yen compared with about 140 yen a year ago.
In January, international investors bought 125.2-trillion yen of Japanese stocks, double a year earlier, according to the Tokyo Stock Exchange. As is true in the United States, some of the biggest winners have been technology companies, like Renesas, SoftBank and Tokyo Electron.
So far, experts say Japan’s shares are not overpriced.
The price-to-earnings ratio for the Tokyo market is about 16, compared with 23 for the S&P 500, 24 for India’s Sensex, and 8 for Shanghai. In 2023, investors in Tokyo shares earned a return of more than 28 per cent, according to the Nikkei’s website.
Meanwhile, another entirely different scenario has been playing out in China, where the markets have never fully recovered from a meltdown in 2015 that wiped out trillions in value.
Markets in both Hong Kong and the Chinese mainland have been chilled by the tensions between Beijing and Washington that oblige companies to think ever more carefully about where to invest.
The Nikkei’s new record was welcomed with applause in some of Tokyo’s brokerages, but not the sort of elation that prevailed in 1989. Back then, seven of the world’s top 10 companies by market value were Japanese. Now, none of them are.
Much of the improvement in Japanese companies’ profitability comes from overseas, source of more than 40 per cent of their earnings, Izumi Devalier, head of Japan Economics for BoA Securities in Tokyo, said during the FT briefing.
“The stock market is not the economy,” she said.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.