Japanese stocks have hit a new milestone – one not seen since 1990

The Nikkei 225 – Japan’s oldest stockmarket index – has finally hit 30,000 for the first time in 30 years. It’s just one more reason to invest in one of our favourite markets, says John Stepek.

We've long been fans of the Japanese stockmarket here at MoneyWeek magazine.It's an obvious side effect of our contrarian tendencies –it's hard to think of any other relatively mainstream asset class that has been treated with more apathy by investors in general, over the two-decade lifetime of the magazine.

So it's nice to see that Japan's stockmarket hit a bit of a milestone this morning. Again. For the first time in more than 30 years. The Nikkei 225 burst past the 30,000 mark for the first time since 1990. I mean, wow – 1990. Some of you weren't even born then.

The Nikkei is a daft index but that's no reason to ignore it

To be absolutely clear, as an index, the Nikkei has its flaws – lots of them. It's very similar to the Dow Jones index in the US from that point of view. The Nikkei has 225 companies in it – the Dow only has 30 – but they both do this rather deranged thing of ranking the stocks in the index by their share price, rather than their market capitalisation. So for example, a company with a million shares outstanding at $1 a share would have a market cap of $1m. A company with 250,000 shares outstanding at $2 a share would have a market cap of $500,000. But the latter company would outrank the former in the Nikkei (or the Dow). Because its share price is bigger.

The only reason people pay attention to the Nikkei is because it's the oldest Japanese stock index. It's been around since 1950. Again, it's the same story for the Dow Jones index. If you want to get a sensible reading of the Japanese or US markets, you shouldn't turn to the Nikkei or the Dow. You should turn to the Topix (Tokyo Price Index), which includes all of the stocks on the Tokyo Stock Exchange, and is weighted in the sensible way, by market cap. Similarly in the US, the S&P 500 is far more representative of the US market.

The counterargument to this is that, for all their flaws, people pay attention to these indices. They go in roughly the same direction as the others that represent their respective nations (indeed you might start to wonder why anyone worries about index composition). For example, the Topix hit its highest level since 1991 too. And when big headline indices hit big eye-catching round numbers, people pay attention. That's because people are people, not narrowly rational automatons. That should be pretty clear by now, given the fun and games we've seen with GameStop recently.

So, Nikkei 30,000, just over 30 years on from the first time, seems like a good moment to take stock of what's going on with the Japanese market right now. 

There are lots of reasons to like Japan, but the simple rebound play is reason enough

Japan has done pretty well in terms of dealing with the Covid-19 pandemic. For reasons that don't appear to be entirely clear (in that its lockdown wasn't notably aggressive), Japan has suffered only a "modest Covid-19 toll" as the Nikkei newspaper puts it.

Meanwhile, its GDP grew at an annualised 12.7% in the fourth quarter of last year. That's a big leap. And the drop in GDP for the whole year was just 4.8%, better than during the financial crisis and better than expected by most economists. In all, the economy is pretty much back to where it was before the coronavirus outbreak. Spending has followed a similar pattern to most other places – consumers spending more on their houses, and a lot less on travelling. That solid pace of recovery has helped to boost cyclical stocks. Capital Economics reckons that first-quarter GDP will turn out to be better than anyone currently expects too. On top of that, "the recovery should get another shot in the arm from the rollout of vaccines".

There are plenty of fundamental reasons to like Japan too – slow but sure corporate governance reforms, the fact that it's one of the few big markets where there are still a lot of "value" stocks. But to be perfectly shallow about it, the rebound potential alone is reason enough. Japan is a market that tends to draw the attention of investors when they're looking for catch-up plays, so anyone who is struggling with FOMO (fear of missing out) right now and is casting about for assets that might deliver big rebounds quickly, will almost certainly alight on Japan at some point in their search.

Last year, Merryn interviewed one of our favourite long-time Japan strategists, Jonathan Allum – you can read more here. And we'll have a lot more on all of this in MoneyWeek magazine in the near future. Get your first six issues free here.

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