At a glance
- Japan’s Nikkei 225 index topped a 34-year high to reach 39,000
- While this is a reason for optimism, the weak yen has played a significant role, enticing overseas investors
- A shift in corporate governance has had a longer-term impact, increasing yields for investors
As Japan’s Nikkei 225 index broke a 34-year record for earnings, there was a cautiously optimistic response. With news that the country slipped into recession in the final quarter of 2023, the buoyant results from the stock exchange brought a reason for hope.
On February 22, the intraday index of Japan’s biggest 225 companies closed above 39,000, surpassing the 38,915 recorded set on December 29 1989. The strength of US artificial intelligence and chipmaker Nvidia pushed the number over the line.
For a market which had struggled throughout the early 2000s and into the 2010s, the result may mark a turning point in Japanese market fortunes. The index had been below 30,000 for 30 years until February 2021, and saw a record low of 7162 during the 2008 financial crisis.
Since the start of 2023, the Nikkei index has risen by 17.5 per cent, and was one of the world’s top-performing indexes in 2023, with an overall increase of 30 per cent. The success has promoted Bank of America equity strategists to increase their 2024 forecast for the Nikkei 225 to 41,000.
Commenting on the news, Hiromi Yamaji, group CEO of the Japan Exchange Group, said he believed the strong performance of the Japanese market reflected the positive outlook of both domestic and foreign investors.
“Our top priority as a market operator is to maintain an orderly and stable market operation under all circumstances. We also make it our mission to promote the attractiveness of the market globally, inviting more investors both domestic and foreign to join and will continue in our efforts to create a more investable market,” he said.
Experts say that the event is important because it will help with shaking off the image of inertia in corporate Japan.
Weak yen
However, there are caveats to the recent success. Many of the companies in the Nikkei index generate most of their earnings overseas. And the Topix index, which focuses on domestic companies, is tracking at around 8.5 per cent below a record high.
The weak yen has been cited as a driving force in the market’s success, as the weak currency has significantly raised the local currency value of the overseas earnings of Japanese companies.
The yen’s value has fallen by 6 per cent against the dollar since the start of the year, and reached a 33-year low at the end of 2023.
Hubert de Barochez, senior markets economist at economic consultancy Capital Economics, says: “I think we need to be a bit cautious, because there has been a close relationship between the ratio of Japanese equities over the rest of the world equities, and the Japanese yen exchange rate to the dollar has been very closely correlated. If you look at the latest increase in the Topix it is matched with the latest weakness in the yen.”
Corporate governance
The structure of corporate Japan is helping to tempt investors, and become more shareholder-friendly, and dividends are now four times higher than they were in 1989. This comes as Japan moves away from a bank-centred economy to one where corporates are paying more attention to their share prices and seeing the stock market as a source of funding.
Geopolitics is also helping strengthen the exchange, and some investors are looking away from China for a safer location for their funds.
The enthusiasm for AI, as seen with the success of Nvidia, is likely to help Japan to continue seeing strong results because the stock market is tech-heavy, says de Barochez.
