THE LAND OF THE RISING SUN AGAIN?
Japan's stock market (Nikkei 225) has hit a new all-time high for the first time since December 1989, when Band Aid topped the music charts with "Do They Know It's Christmas?" and The Simpsons had just made its debut on TV.
In this note, we explain why it took so long and what has driven the Japanese stock market to new highs.
The bottom line is that the recovery to new historical highs appears justified amid positive developments around corporate governance, in particular, as well as hopes of economic normalisation and favourable tailwinds from loose monetary policy and strong exports.
As per our 2024 Investment Outlook, ILIM sees room for further upside in equity markets over the next 12 months with Japan expected to participate alongside other regions.
Japan's stock market peak in December 1989 was followed by a sharp decline as the asset price bubble burst, led by a crash in land prices. This had severe economic consequences including prolonged recessionary conditions and deflation.
As a deflationary mindset took hold in the economy, this led to caution among both consumers and businesses and this made it difficult for Japan to exit these conditions. Despite zero interest rates and the advent of quantitative easing in 2001, growth and inflation remained low.
EAST MEETS WEST
A few factors have recently supported the stock market including:
Corporate governance: Japan's efforts to improve corporate governance have accelerated in recent years, including requiring large listed companies to have plans that improve capital efficiency and engage with shareholders in order to remain listed.
Economic normalisation: There are hopes for a more virtuous economic cycle whereby inflation accelerates back sustainably to around 2% and improved wage rises supports higher underlying trend growth. Consumer prices rose by 2.6% y/y in December 2023 and there have been numerous inflation busting wage hikes announced over the past couple of years.
Monetary policy: The Bank of Japan has kept its policy loose at a time when other major central banks have embarked on the sharpest monetary tightening in 40 years, which has made equities relatively attractive.
Exports: The loose monetary policy stance has put downward pressure on the Japanese yen, which is currently hovering around the weakest level since 1989. This has supported Japan's export sector - a mainstay of the economy.
ILIM'S BOTTOM LINE
Japan's stock market has spent decades in the doldrums, but the recovery to new historical highs appears justified amid positive developments around corporate governance, in particular, as well as hopes of economic normalisation and favourable tailwinds from loose monetary policy and strong exports.
As per our 2024 Investment Outlook, ILIM sees room for further upside in equity markets over the next 12 months with Japan expected to participate alongside other regions.
This is intended as a general review of investment market conditions. It does not constitute investment advice and has not been prepared based on the financial needs or objectives of any particular person.