Early this week Japan’s main stockmarket index, the Nikkei 225, jumped above 18,700, its highest level since 2000. Solid global data and news of China’s latest interest-rate cut, which bolstered global risk appetite, were the main causes of the latest rise. The market remains around 50% below its all-time peak of 39,000 reached in 1989.
What the commentators said
In the past few years, stockmarket rallies have been accompanied by a weak yen, in turn caused by the Bank of Japan’s quantitative-easing policies. But the currency’s decline has been “something of a sideshow” in the past few weeks, as the FT’s Josh Noble pointed out.
Stocks have jumped by almost a third since October 2014, when the GPIF – the pension fund for public-sector employees – announced that it will pour billions more into shares. The Bank of Japan has also been buying stocks.
The “tremendous buying power” from these two sources is the key reason for the latest market surge, said Nikko Asset Management’s John Vail. There is also growing confidence that the new government is prioritising an overhaul of corporate governance. That would pave the way for share buybacks and dividend increases.
However, the economic backdrop is also looking increasingly healthy. Annualised GDP growth of 2.2% in the fourth quarter undershot expectations, but the recovery from the mid-year recession of 2014, induced by a hike in the consumption tax, appears to be gathering pace. In January, exports jumped by 17% year-on-year.
Corporate profits are at record levels, which bodes well for investment and for workers’ incomes. There are finally signs that wages are on the rise, which would help spur consumption and stop the economy falling back into deflation. Wage growth is now running at an annual rate of 0.8%, which is a 15-year high, noted Morgan Stanley. GDP in nominal terms – including inflation – could expand by as much as 3% this year, the fastest rate since 1991.
Nonetheless, if inflation does slip back towards or below zero, the Bank of Japan is likely to print more money; it has said it will make every effort to get inflation up to 2% and overturn expectations of falling prices. That implies further falls in the yen and rises in the Nikkei. So we think Japanese stocks look appealing, whether the economy recovers or not.