Tokyo’s stock market has been on a roll in the first two weeks of 2024, reaching new 34-year highs and closing in on the record levels set during the bubble economy of the late 1980s. Investors are optimistic that Japan is finally overcoming deflation and benefiting from the global recovery from the pandemic.
Japan’s two main stock indexes, the Nikkei 225 Stock Average and the broader Topix, have outperformed all other major markets in the world so far this year. The Nikkei has gained 7.6% and the Topix has risen 6.9%, compared with 3.2% for the S&P 500 and 2.4% for the MSCI World Index. Both indexes have hit their highest levels since 1990, when Japan’s asset bubble burst and triggered a long period of stagnation and deflation.
The strong performance of Japanese stocks reflects the improved outlook for the country’s economy, which has been boosted by the successful rollout of vaccines, the easing of lockdowns, and the stimulus measures taken by the government and the central bank. Japan’s gross domestic product (GDP) grew by 4.6% in the third quarter of 2023, beating expectations and marking the fourth consecutive quarter of expansion. Analysts expect the growth momentum to continue in 2024, with the average forecast for GDP growth at 3.1%, according to a Bloomberg survey.
Japan’s Corporate Sector Shows Resilience and Innovation
Another factor that has supported the rally in Japanese stocks is the resilience and innovation of the country’s corporate sector, which has adapted to the challenges posed by the pandemic and the changing consumer preferences. Japanese companies have increased their profitability, efficiency, and competitiveness, while also focusing more on environmental, social, and governance (ESG) issues and shareholder returns.
According to data from Bloomberg, the return on equity (ROE) of Japanese companies has risen to 9.8%, the highest level since 2008, and the earnings per share (EPS) growth has averaged 22.4% in the past five years, outpacing the global average of 15.6%. Japanese companies have also increased their dividend payouts and share buybacks, signaling their confidence in their future prospects and their willingness to reward their investors.
Moreover, Japanese companies have shown their ability to innovate and create new products and services that cater to the evolving needs and tastes of the global market. Some examples of such innovations include:
- Sony’s PlayStation 5, which has become the fastest-selling console in history, selling more than 25 million units in its first year of launch.
- Toyota’s hydrogen-powered Mirai, which has become the world’s best-selling fuel cell vehicle, with more than 50,000 units sold since its debut in 2014.
- Uniqlo’s AIRism masks, which have become a popular choice for consumers who want breathable and comfortable face coverings amid the pandemic.
- Nintendo’s Animal Crossing: New Horizons, which has become one of the most successful video games of all time, selling more than 40 million copies and creating a global phenomenon of virtual socializing and creativity.
Japan’s Stock Market Still Has Room to Grow
Despite the impressive gains in Japanese stocks, many analysts believe that the market still has room to grow and that the current rally is more sustainable than the previous one that ended with the burst of the bubble economy. They point out that the valuations of Japanese stocks are still reasonable and attractive compared with other markets and historical averages.
The Topix is currently trading at around 15 times expected earnings, which is in line with its 10-year average and lower than the global average of 17 times. The price-to-book ratio (P/B) of the Topix is 1.4, which is far below the peak of 5.4 reached in 1989. The price-to-earnings ratio (P/E) of the Nikkei is 19.6, which is also much lower than the astronomical level of 70.6 seen in 1989.
Furthermore, the fundamentals of the Japanese economy and the corporate sector are much stronger and healthier than they were in the late 1980s, when the market was driven by speculation and inflated asset prices. Japan’s public debt, which is the highest in the world, is mostly held by domestic investors and institutions, reducing the risk of a sovereign debt crisis. Japan’s current account surplus, which reflects the country’s net income from trade and investment, is still positive and stable, indicating the country’s external strength. Japan’s inflation rate, which has been a chronic problem for decades, is expected to rise gradually and moderately, as the economy recovers and the central bank maintains its ultra-loose monetary policy.
Therefore, many investors are betting that Japan’s stock market will continue to rise and eventually surpass its all-time high of 38,916, which was set on December 29, 1989. According to a Bloomberg survey, the average forecast for the Nikkei at the end of 2024 is 41,000, which implies a gain of 9.6% from the current level of 37,400. Some analysts are even more bullish, predicting that the Nikkei will reach 50,000 or higher in the next few years.