Japanese stocks soared to unprecedented levels as the Nikkei 225 index hit a record peak, surpassing levels last observed in 1989 during the era of the bubble economy. The Nikkei share average surged to 39,156.97 points, breaking the previous intraday all-time peak of 38,957.44 points registered on the final trading day of 1989. The Nikkei closed 2.19% higher at 39,098.68 on Thursday.
This achievement marks a historic moment, taking 34 years for the Nikkei to reclaim its position, setting a record for a major market. This recovery period surpasses the decade it took Wall Street to recover from the 1929 crash and Great Depression.
Market analysts interpret this milestone as the dawn of a new era, signaling a departure from deflation and the emergence of a transformed financial landscape. The Nikkei has exhibited resilience, defying challenges such as a Japanese recession, global conflicts, an inflation shock, and rising global interest rates. Its resilience is attributed to trade exposure, insulation from declining domestic demand, and support from a weakened currency benefiting exporters.
The Nikkei’s remarkable rally also marks the end of decades of lackluster performance that deterred global investors. The return to these levels holds significant psychological importance for the Japanese people, particularly the younger generation that has never witnessed such heights.
Corporate governance reforms in Japan, along with attractive valuations spotlighted by notable investments like Warren Buffett’s in 2020, have contributed to the foreign influx. Foreign investors injected ¥6.3 trillion ($42 billion) into the equity market in the previous year. Their positive sentiment continued in January with a net investment of ¥1.16 trillion in Japanese equities.
A robust earnings season, a depreciating yen, and the expectation of prolonged ultra-easy monetary policies from the Bank of Japan have fueled the market’s momentum in 2024.
Japan’s market has also benefited from corporate reforms, drawing attention away from struggling Chinese markets. The Nikkei’s ascent has contrasted sharply with the Hang Seng Index’s 7% decline in 2024 and China’s CSI300 index nearing five-year lows.
Despite the weakened yen affecting returns in dollar terms, investors see potential for sustained growth. Steps taken by the Tokyo Stock Exchange to enhance capital efficiency and encourage share buybacks have positively impacted investor fundamentals. A significant corporate cash pile and ample household savings present additional potential drivers for market gains.
While the Nikkei’s current levels evoke memories of the 1980s boom and subsequent collapse, market dynamics differ significantly. The present market lacks the excesses seen in 1989, with a more reasonable forward price-to-earnings ratio. The current ratio stands at 20.5 for the Nikkei, compared to over 50 during the bubble era.
Japan’s market resilience amid China’s downturn and its attractiveness compared to U.S. and Chinese stocks have contributed to increased global interest. The milestone reached by the Nikkei 225 is seen by many investors as a positive turning point, with expectations of further growth in the coming months.