Daily Management Review

Nikkei Sets A Record High, Partying Like It's 1989


Nikkei Sets A Record High, Partying Like It's 1989
In 1989, during the heyday of the bubble economy, Japanese equities reached a record high that they broke on Thursday. This is because of corporate reforms and low valuations that are luring overseas investors seeking alternatives to the volatile Chinese markets.
Above the previous intraday all-time high of 38,957.44 points reached on the last trading day of 1989, the Nikkei share average increased to a high of 39,156.97 points. The Nikkei ended Thursday 2.19% higher at 39,098.68, but the benchmark index closed that day at 38,915.87.
A decade longer than Wall Street took to recover losses from the 1929 crash and Great Depression, the 34 years it has taken to regain its footing is also a record for a major market.
"For us traders, this marks the arrival of a new era," said Tsutomu Yamada, senior market analyst at Au Kabucom Securities in Tokyo. "It feels like the stock market is telling us that we've finally escaped from deflation and a new world has opened up."
Following a 28% surge in 2023, when it was the highest performing Asian major exchange, the index is up about 17% this year. In contrast, the tech-heavy Nasdaq surged 43% last year and has increased 6% so far in 2024.
Moments after afternoon trading began, some twenty traders at brokerage Nomura's Tokyo trading floor were on their feet when the Nikkei exceeded its peak from 1989. Some cheered softly and one person said "bravo" while others clapped.
When the benchmark index surpassed its previous all-time closing high of 38,915 in the morning session, there were even louder celebrations and sustained clapping.
A global inflation shock, wars in Europe and the Middle East, a recession in Japan, and rising rates globally have all been overcome by the Nikkei rebound. Its trade exposure has protected it from declining domestic demand, and exporters' profits have increased as a result of a weaker currency.
Additionally, the milestone marks the end of decades of poor performance that had turned off international investors.
"It is hard to overstate the psychological impact to Japanese people of the Nikkei returning, since a generation has never seen that level," said Richard Kaye, a Japan-based portfolio manager at Comgest.
"The magnetism of the market could draw in unforeseen amounts of domestic liquidity," he said.
Changes in corporate governance in Japan are causing buybacks and unwinding cross-holdings, and now international investors are driving the rise with investments like Warren Buffett's sizable 2020 investment highlighting excellent prices.
Last year, foreign investors flooded the share market with 6.3 trillion yen, or $42 billion. In January, they invested a total of 1.16 trillion yen in Japanese stocks.
The beginning of 2024 saw the market surge because to a strong earnings season, a declining yen that is back around 150 per dollar, and predictions that the Bank of Japan will continue its ultra-easy monetary policy for some time.
According to Bank of America's February Asia fund manager poll, "optimism on Japan remains unscathed."
In the upcoming year, almost one in three participants anticipated double-digit returns from the Japanese stock market. Fund managers are favouring bank and semiconductor companies, according to BofA analysts, who described the market as "by far, the favourite in the region."
According to a Reuters survey released on February 22, analysts upgraded their year-end projections from 35,000 in November to 39,000 by the end of 2024. However, flows in the derivatives market suggest that the short-term momentum may be interrupted.

The soaring heights of the Nikkei bring up memories of the 1980s boom years as well as the market and other asset collapse that signalled deflation and Japan's "lost decade," leaving a generation of investors traumatised.
Let's fast-forward Thirty years later, there's far less puffery and no signs of impending disaster, with inflation hovering around 2% and corporate profits surging despite the economy entering a recession at the end of the previous year.
In contrast to banking and real estate stocks thirty years ago, some of the companies driving the boom include Tokyo Electron, the developer of chip tools, and Fast Retailing Co., the parent company of Uniqlo.
"It cost a lot back in 1989 and 1990. This time, it's still realistic," stated Junichi Inoue, head of Janus Henderson's Japanese equities division.
According to Refinitiv statistics, the forward price-to-earnings ratio of Japanese stocks, a standard measure of value, reached beyond 50 during the bubble phase and is currently at 20.5 for the Nikkei, compared to 25 for the Nasdaq and 20.4 for the S&P 500 index.
The Japanese market has also benefited from the bourse's vigorous push for corporate reform as well as the fortunate timing of its performance—it has been rising while China has been collapsing.

While the Nikkei has surged, China's blue-chip CSI300 index is close to five-year lows, which is keeping money away, while Hong Kong's Hang Seng Index is down 7% in 2024 after falling 14% the previous year.
According to allocators, a portion of that money is making its way to Japan, where global funds have been underweight the market for years due to the strong performance of Chinese and American stocks.
Indeed, as Japan seeks to find a way out of its deflationary slump and negative interest rates, investors are wary of abrupt changes in the currency in either direction. A weaker yen has eaten away at gains in dollar terms.
However, investor fundamentals are improving as a result of measures taken last year by the Tokyo Stock Exchange to encourage businesses with underperforming stocks to enhance their use of capital. These actions include record share buybacks and the unwinding of ineffective cross-shareholdings.
The TSE stated last month that about half of the businesses on its prime section had cooperated with its request to reveal their plans to increase capital efficiency, and it had published a list of such businesses for the first time.
Investors claim that a corporate cash hoard, which was estimated to be worth 555 trillion yen in 2022, could fund many additional buybacks, and that individuals' cash hoard of 2.1 quadrillion yen may also fuel price increases and provide momentum to bring capital into the market.
The market's ascent to unprecedented heights has been highly anticipated by several investors, many of whom are placing bets on further gains.
"The first word that came to my mind is 'finally'," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute in Tokyo.
"Finally, it surpassed the bubble-era high after 30-plus years. But Japan today isn't 'bubbly' at all - it's hardly overvalued. The momentum for further rise is there. It will head to 40,000 yen levels next."