People are reflected in an electronic quote board showing the Nikkei 225 Stock Average issued (top) as they cross a street in Tokyo on May 17, 2023. (Photo by Kazuhiro NOGI/ AFP) (Photo by KAZUHIRO NOGI/AFP via Getty Images)
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Japan’s stock market is testing new highs not seen since 1990 — evoking memories of the “bubble economy” just before the country fell into the so-called “lost decade.” .
From the end of May, Nikkei225 crossed the 30,000 mark, a feat unseen in 33 years.
Apparently, the benchmark is still about 18% below its all-time high, when the Nikkei hit 38,915 on December 29, 1989.
The bubble burst after the Bank of Japan tightened monetary policy in the early 1990s, causing a collapse in stock and land prices. By September of that year, the Nikkei had fallen to just half its all-time high.
But analysts who spoke to CNBC said Japan is not headed for another bubble-like collapse.
“It’s hard to argue that Japan is facing similar situations to what it was in the late 1980s,” said Dong Chen, head of macroeconomic research at private bank Pictet. .
Ryota Abe, an economist for global markets and treasury department at Sumitomo Mitsui Banking Group, shares the same view.
“We don’t see a bubble in the economy,” he said, pointing out that while property prices in the capital Tokyo have skyrocketed and inflation is at a multi-decade high, it’s not. It is a nationwide phenomenon that is only found in a few regions. in Tokyo.
Furthermore, “the current high inflation rate in Japan is due to higher import costs due to the weaker yen and high commodity prices. We cannot call it a bubble,” added Abe.
What led to Japan’s bubble?
The Japanese economy’s rapid growth, low unemployment, and easy access to credit in the 1980s fueled a rally in stocks at the time.
The interest rate of the Bank of Japan then was 2.5% — its lowest since the central bank switched to a floating exchange rate regime in the early 1970s.
Low interest rates fueled speculation, pushed up the stock market and led to asset price bubbles.
As the BOJ raised interest rates, the world’s third-largest economy fell into a decade-long crisis known as “Japan’s lost decade” – a period of slow to negative economic growth that continued. until today.
Over the past two decades, Japan’s GDP average increase of 0.7% from 1991 to 2011 and from 2011 to 2019, Japan’s GDP grew just under 1%.
This time is different
Abe said the stock market rally was different this time around, and the Nikkei’s outperformance could also be attributed to a number of other factors.
First, listed companies posted better-than-expected financial results, thanks to a weak yen, which made Japanese products relatively cheaper than competitors.
As a result, Japanese companies have seen stronger economic performance abroad.
In addition, many Japanese companies have bought back their shares in return The push of Tokyo Exchange Group for more efficient use of capital.
Nikkei reported in March that share buybacks by Japanese companies hit a 16-year high.
Reforms take effect
Mr. Chen pointed out that Japan has also seen “some structural changes” over the past decade, under the leadership of the late Prime Minister Shinzo Abe, who took office in 2012 and implemented the so-called its “Abenomics” policy.
The prime minister’s signature economic policy is based on “three arrows” of increasing the money supply, increasing government spending, and economic and regulatory reforms to make Japan more competitive globally, Chen said. the third arrow can finally achieve some results.
Most notably, he points out, spending by Japanese companies has gone higher, which means companies are investing again.
ONE Report June 23 Nikkei finds that investment capital by Japanese companies will reach a record 31.6 trillion yen ($221.03 billion) in fiscal year 2023.
The report says domestic investment – about two-thirds of the total – is expected to post double-digit growth for the second consecutive year, while outbound investment could grow 22.6% , marking the third consecutive year of double-digit growth.
That means Japanese companies may have come out of the so-called “balance sheet recession” mentality, where households and businesses aim to reduce debt rather than collect revenue, Chen said. attract new investment.
“Now we’re seeing the opposite, which means they’re actually investing because they haven’t been investing for too long… we think this trend could last longer.”
Driven by foreign interest
Foreign investors interest has also returned to the world’s third-largest economy.
Abe from SMBC points out that Japan’s economic recovery has already begun and there have been notable changes in the business environment – such as higher wage growth in 2023.
Foreign investors have found opportunity in Japan, thanks to the lower yen’s value and higher upside potential for equities.
Billionaire investor Warren Buffet’s optimistic outlook for Japanese stocks has also attracted the interest of investors in Japan.
There are also external factors fueling optimism about Japan.
Global companies are now diversifying supply chains away from China, and Chen said Japan could benefit as one of the destinations to restore supply chains, “especially in sectors very high-end, more technology-dense like semiconductors.”
“All of this is pointing in the right direction, we think there are reasons to be more structurally positive towards Japan than in the past,” he added.
The way forward
The Bank of Japan will play an important role in whether the stock market continues to grow.
As mentioned, when the BOJ tightened monetary policy in the early 1990s, the Japanese market fell.
Now that the BOJ’s new governor, Kazuo Ueda, is expected to take the BOJ out of an extremely dovish stance, does such a future lie ahead for the market?
Oliver Lee, portfolio manager at Eastspring Investments, a subsidiary of British insurer Prudential, told CNBC that with inflationary pressures mounting in Japan, monetary policy could become “tight” a little tighter” over the next 12 months.
“Short-term technical indicators are looking bullish and maybe a pause or even a minor correction is a good thing,” Lee predicts.
Still, the case for long-term investment in Japan remains strong, Lee said, citing improved underlying corporate profits and continued corporate governance supported by institutions like the Stock Exchange. Tokyo Stock Exchange.
Most notably, Lee pointed out that most international investors are still underestimating Japan in their portfolios.
With the trend of corporate share buybacks expected to continue, he said demand for Japanese shares will remain strong in the second half of the year.
