Why Japan’s Stock Market Hit an All-Time High? Know now

Japan’s Nikkei 225 index, which tracks the performance of the largest companies listed on the Tokyo Stock Exchange, reached a record high of 39,000 points on February 22, 2024. This was the first time since 1989 that the index surpassed this level, and it reflected the strong recovery of the Japanese economy and corporate sector from the COVID-19 pandemic and other challenges. In this blog post, I will explain the 10 factors Why Japan’s Stock Market Hit an All-Time High? And what it means for the future of Japanese equities. Here are some of the important factors that contributed to this milestone:

10 factors Why Japan’s Stock Market Hit an All-Time High?

1. Robust earnings: 

Many Japanese companies reported better-than-expected earnings for the third quarter of fiscal year 2023, which ended in December 2020. Some of the sectors that performed well included technology, manufacturing, retail, and health care. For example, Sony reported a 62% increase in operating profit, driven by strong sales of its PlayStation 5 console and its image sensors. Toyota also posted a 54% rise in operating profit, thanks to its cost-cutting measures and rebounding demand in China and the US.

2. Investor-friendly measures: 

Many Japanese companies also announced shareholder-friendly policies, such as dividend hikes, share buybacks, and mergers and acquisitions. These measures signaled confidence in the future prospects of the businesses and increased their attractiveness to investors. For instance, SoftBank Group announced a $23 billion share buyback program, the largest in its history, as well as a 10% increase in its dividend. Nippon Steel, Japan’s largest steelmaker, also said it would resume dividend payments after suspending them due to the pandemic. Japan’s Stock Market

3. Risk-on sentiment: Japan’s Stock Market

The global market sentiment improved in February 2024, as the rollout of COVID-19 vaccines accelerated and the US Congress passed a $1.9 trillion stimulus package. These developments boosted the hopes for a faster and stronger economic recovery, and encouraged investors to take more risks and seek higher returns. As a result, the demand for Japanese stocks, which are considered undervalued and cyclical, increased. Moreover, the weakness of the Japanese yen against the US dollar also supported the export-oriented Japanese companies, as it made their products more competitive and increased their overseas earnings.

4. Domestic reforms: Japan’s Stock Market

The Japanese government also implemented some structural reforms that aimed to enhance the competitiveness and productivity of the domestic economy. These reforms included lowering the corporate tax rate, promoting digitalization and innovation, and addressing the labor shortage and aging population. For example, the government launched a new agency to oversee the digital transformation of the public and private sectors, and allocated $19 billion for this purpose in its budget for fiscal year 2024. The government also introduced a new immigration policy that allowed more foreign workers to enter and stay in Japan, especially in sectors that faced labor shortages, such as construction, agriculture, and nursing.

5. Monetary and fiscal stimulus: 

The Bank of Japan (BOJ) and the Japanese government also continued to provide monetary and fiscal stimulus to support the economy and the financial markets. The BOJ maintained its ultra-loose monetary policy, keeping its key interest rate at -0.1% and its target for the 10-year government bond yield at around 0%. The BOJ also expanded its purchases of exchange-traded funds (ETFs) and corporate bonds, and extended its special lending programs for small and medium-sized enterprises (SMEs). The Japanese government also announced a series of supplementary budgets, totaling about $3 trillion, to fund various measures to combat the pandemic and its economic impact, such as cash handouts, subsidies, tax breaks, and infrastructure spending. Japan’s Stock Market

6. Global recovery: 

The Japanese economy and stock market also benefited from the recovery of the global economy, especially in its major trading partners, such as China, the US, and the EU. The growth of these economies boosted the demand for Japanese exports, such as automobiles, machinery, electronics, and chemicals. According to the Ministry of Finance, Japan’s exports rose by 6.4% year-on-year in January 2024, the fourth consecutive month of increase. The exports to China, Japan’s largest trading partner, jumped by 37.5%, the highest growth rate since 2010. Japan’s Stock Market

7. Corporate governance: 

The corporate governance of Japanese companies also improved in recent years, as they adopted more international standards and best practices. These improvements included increasing the number of independent directors, enhancing the disclosure and transparency of financial information, and strengthening the oversight and accountability of management. These changes increased the trust and confidence of investors, both domestic and foreign, in the Japanese corporate sector. According to the Tokyo Stock Exchange, the number of companies that complied with its corporate governance code increased from 78% in 2015 to 97% in 2020. Japan’s Stock Market

8. Innovation and technology: 

The Japanese companies also demonstrated their innovation and technology prowess, as they developed and launched new products and services that met the changing needs and preferences of consumers and businesses. Some of the examples of these innovations included Sony’s artificial intelligence (AI) powered cameras, Panasonic’s hydrogen fuel cells, Nintendo’s Switch gaming console, and Rakuten’s mobile network. These innovations gave the Japanese companies a competitive edge in the global market and increased their brand value and recognition.

9. Environmental, social, and governance (ESG) factors: 

The Japanese companies also increased their awareness and commitment to environmental, social, and governance (ESG) factors, which are becoming more important for investors and stakeholders. These factors include reducing greenhouse gas emissions, improving labor conditions, enhancing diversity and inclusion, and ensuring ethical and responsible business conduct. The Japanese companies also participated in various initiatives and frameworks that promoted ESG principles, such as the Task Force on Climate-related Financial Disclosures (TCFD), the UN Global Compact, and the Principles for Responsible Investment (PRI). Japan’s Stock Market

10. Market liquidity: Japan’s Stock Market

The Japanese stock market also enjoyed high liquidity, as the trading volume and value increased significantly in recent years. The liquidity was driven by the active participation of various types of investors, such as individuals, institutions, foreigners, and public entities. The liquidity also reflected the availability and accessibility of various financial instruments and platforms, such as ETFs, derivatives, margin trading, and online brokerage services. The high liquidity facilitated the price discovery and risk management of the Japanese stocks, and increased their attractiveness to investors.

Conclusion: Japan’s Stock Market

In conclusion, the ascent of Japan’s Nikkei 225 to 39,000 points represents not only a numerical milestone but a comprehensive reflection of a resilient economy, robust corporate performance, and strategic reforms. As Japan continues on this trajectory, investors worldwide are likely to keep a keen eye on the opportunities presented by this dynamic market.

FAQs: People also Ask

1. Why is the Nikkei going up?

The Nikkei’s recent surge can be attributed to several key factors:

• Robust Corporate Earnings: Many Japanese companies reported better-than-expected earnings, particularly in sectors like technology, manufacturing, retail, and healthcare. This strong corporate performance has instilled confidence in investors.
• Investor-Friendly Measures: Japanese companies have implemented shareholder-friendly policies, such as dividend hikes, share buybacks, and mergers and acquisitions. These measures enhance the attractiveness of Japanese stocks to investors.
• Global Economic Recovery: The global economic recovery, especially in major trading partners like China, the US, and the EU, has boosted the demand for Japanese exports. This, in turn, has positively impacted the Nikkei.
• Government Reforms: Structural reforms by the Japanese government, including lower corporate tax rates, digitalization promotion, and an inclusive immigration policy, have contributed to the nation’s economic rejuvenation and market confidence.
• Monetary and Fiscal Stimulus: The Bank of Japan (BOJ) has maintained an ultra-loose monetary policy, and the Japanese government introduced significant fiscal stimulus, supporting both the economy and the financial markets.
• Positive Global Sentiment: The improved global market sentiment in February 2024, fueled by accelerated COVID-19 vaccine rollouts and the passage of a substantial US stimulus package, has encouraged investors to take more risks, benefiting the Nikkei.

2. How Japan’s Nikkei 225 got its mojo back?

Several factors have contributed to the resurgence of Japan’s Nikkei 225:

• Earnings Resilience: Japanese companies demonstrated resilience with better-than-expected earnings, particularly in sectors like technology, manufacturing, and retail.
• Government Initiatives: The Japanese government implemented strategic reforms, including lower corporate tax rates, digitalization promotion, and an inclusive immigration policy, enhancing the nation’s economic outlook and boosting investor confidence.
• Global Economic Recovery: The recovery of major global economies, especially Japan’s key trading partners, has stimulated demand for Japanese exports, contributing to the Nikkei’s positive momentum.
• Investor-Friendly Policies: Japanese companies adopting shareholder-friendly measures, such as share buybacks and dividend increases, have increased their appeal to investors, positively impacting the Nikkei.
• Monetary and Fiscal Support: The Bank of Japan’s ultra-loose monetary policy, coupled with significant fiscal stimulus from the Japanese government, has provided crucial support to both the economy and the financial markets.

3. What caused the Japanese stock market crash?

The Japanese stock market crash of the early 1990s, often referred to as the “Lost Decade,” was primarily caused by:

• Asset Price Bubble Burst: The Japanese economy experienced an asset price bubble in the late 1980s, driven by speculation in real estate and stocks. When the bubble burst around 1991, it led to a sharp decline in asset values.
• Excessive Speculation and Overvaluation: During the bubble, there was excessive speculation, leading to overvaluation of assets. When the bubble burst, stock prices plummeted, causing significant losses for investors.
• Banking Crisis: The bursting of the bubble exposed weaknesses in the banking sector, as banks faced a surge in non-performing loans. This banking crisis further exacerbated the economic downturn.
• Deflationary Pressures: The aftermath of the bubble burst resulted in a prolonged period of deflation, as falling asset prices and economic uncertainty led to reduced consumer spending and investment.
• Lack of Effective Policy Response: Initial policy responses were criticized for being insufficient to address the magnitude of the crisis. The Bank of Japan’s hesitant approach and delayed efforts to stabilize the economy contributed to the prolonged economic downturn.
• Structural Issues: The Japanese economy faced structural issues such as an aging population, rigid labor markets, and a lack of structural reforms, which hampered a swift recovery.

The combination of these factors resulted in a protracted period of economic stagnation and a significant decline in the Japanese stock market during the early 1990s.

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