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Japanese Stocks Reach New Highs: Is It Too Late to Enter the Market?

March 26, 2024

As the first quarter of 2024 approaches its end in less than ten days, the global stock market landscape is marked by the remarkable performance of the Nikkei Index. So far this year, it has surged nearly 20%, surpassing the 40,000milestone for the first time in history on March 4, closing at 40,109 points. To find the previous historical high of the Nikkei, one would have to go back 34years to December 29, 1989, when it closed at 38,957 points. The 1990s saw Japan's stock market decline rapidly following the burst of the economic bubble, with the Nikkei index remaining below the 20,000 level for most of the period until the 2010s. It wasn't until after 2017 that Japan's stock market began to show signs of recovery, with the Nikkei index not surpassing 25,000points until November 2020. This period of stagnation is often referred to as the 'lost 30 years.'

Indeed, the impressive performance of the Japanese stock market didn't start this year. In 2023, the Nikkei Index grew by 28.2% for the full year, second only to the Nasdaq Index's growth of 43.4%, which focuses on tech and internet stocks. This article will delve into various factors that have enabled Japan's stock market to shake off the shadows of the past three decades, providing more practical references for investors interested in investing in Japanese stocks.

Since the introduction of Abenomics' three arrows economic policy at the end of 2012,its extensive quantitative easing measures have led to a prolonged weakening of the Japanese yen. During October to November 2023, the US dollar even breached the 150 level against the yen. With the yen at historically low levels reminiscent of the 1990s, it has heightened the allure of the Japanese stock market to international investors. Media exposure last year revealed that Warren Buffett, known as the "Oracle of Omaha," began intensively increasing his holdings in Japan's five major trading houses (including Sumitomo, Mitsubishi, Mitsui, Itochu, and Marubeni) from 2020 onwards. his news has reignited international investor interest in the Japanese market, with some even considering it as an alternative to the Chinese market. One of the most significant reasons for the standout performance of the Japanese stock market in recent years is the corporate governance reform implemented by the Tokyo Stock Exchange. This reform encourages listed companies to enhance their valuation and earnings, while also taking delisting measures against firms that fail to effectively utilize capital. In January of this year, the Tokyo Stock Exchange's first review report on corporate capital utilization efficiency received high praise from the international investment community.

A recent report from HSBC highlights that some offshore hedge funds and overseas long strategy funds have returned to the Chinese stock market. However, whether this return is a temporary tactical move or a long-term strategic shift remains to be seen and requires further observation. If the Chinese economy and US-China relations fail to improve, international funds may seek alternative opportunities in Asian markets, thereby keeping the Japanese stock market in favour. While emerging markets like India and Vietnam also attract investment interest, Japan's market excels in terms of maturity, internationalization, and transparency.

In terms of the yen, Japan's low exchange rate has been based on the central bank's ultra-loose monetary policy and negative interest rate measures over the years. Recently (March 19), the Bank of Japan announced the anticipated end of its negative interest rate policy. While the yen's immediate direction remains unclear, Japanese stocks haven't shown significant pressure in response. However, in the long term, the yen's weak pattern is expected to change. It's noteworthy that for international investors, declines in stock prices may be offset by currency appreciation. As for Japan's economy, on March 15, the National Confederation of Trade Unions announced an average wage hike rate of5.28% in the spring 2024 labour negotiations, the first time exceeding 5% since1991. This reflects a strengthening positive cycle between wages and prices in Japan. With Japan's economy finally escaping deflation after many years," investing against inflation" is becoming a pressing issue for the Japanese population, which is beneficial for the Japanese stock market.

Considering these factors, the upward trend in the Japanese stock market appears more than temporary, though a 20% surge within a quarter is uncommon, suggesting potential short-term profit-taking or technical adjustments. Therefore, investors interested in Japanese stocks but yet to take action might consider making market entry preparations.

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