Japanese stocks reach a 30-year high

Cherry blossoms and Mount Fuji — After decades of false dawns, the sun is finally rising on the local stockmarket

(Image credit: © Alamy)

After several decades of “false dawns” the sun is finally rising on Japanese shares, says Ian Cowie on Interactive Investor. The Nikkei 225 index has broken through the 30,000-point level for the first time since 1990. Roaring Japanese markets had dominated financial headlines for much of the 1980s. When “the music stopped” few could have predicted that it would be such a long climb back. Sadly, “quite a few long-term investors in the world’s third-largest economy” didn’t live to see this day.

A protracted post-bubble hangover

The “lost decades” after the stockmarket bubble’s implosion have turned Japanese equities into the “red-headed stepchild of global asset allocation”, says Udith Sikand for Gavekal Research. There have been moments of hope: foreign investors poured $240bn into the local market after former prime minister Shinzo Abe’s second term began in 2012. But they soon became disillusioned, withdrawing all of those funds by the time his premiership ended last summer. They shouldn’t have: corporate reforms under Abe have led to “structural improvements in Japan Inc.’s profitability”.

Don’t let the Nikkei fanfare distract from Japan’s economic problems, says The Japan Times. They range from “stunted” productivity to an overdependence on “old economy” industries. The latest rally may not have much further to run. The market may have broken through the 30,000 mark, but it remains well short of 38,957, the all-time high it reached in 1989. “Only in Japan” would analysts say things had gone too far when the market is trading “where it was 30 years ago”, Nicholas Smith of CLSA told Eustance Huang on CNBC. Few foreign investors have noticed, but local shares have been performing strongly for a while: the Topix stock benchmark has gained 125% since late 2012, outperforming many other major markets. The Nikkei 225 has soared by more than 10% since 1 January, compared with a 3.4% gain in the pan-European Stoxx 600 and a 4.2% rise on the S&P 500.

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The Nikkei exorcises its demons

While 30,000 may be an arbitrary number, the “historic resonance of 1990 is powerful”, says Leo Lewis in the Financial Times. Japanese stocks have long been held back by a folk memory of the “deranged…bubble era”. In the years since, local investors could be expected to sell whenever shares rallied too much for fear of being burned again. The fact that the Nikkei has finally broken above 30,000 and stayed there suggests it is no longer overshadowed by its “manic alter-ego of 1989”.

The world has changed immensely in the three decades since the Nikkei was last at 30,000, says Graham Smith on fidelity.co.uk. Japan was then considered America’s “number-one” challenger; Chinese markets were “well off the radar for most investors”. Once eye-watering valuations have also come down, from as high as 75 times earnings in the early 1990s to 25 today – “a small discount” to global peers. The market’s stable of carmakers, electronics firms and banks is well placed to enjoy a profit surge as global recovery takes hold. “The stars seem to be aligning for Japan.”

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.