© Reuters. People stand in front of electronic screens displaying Japan’s Nikkei share average outside a brokerage in Tokyo, Japan February 22, 2024. REUTERS/Issei Kato
(Reuters) – share average hit a record high on Thursday, surpassing its 1989 peak after a year-long rally driven by cheap valuations, corporate reforms and investment flows diverted from a battered Chinese stock market.
Here’s what analysts and investors say:
TSUTOMU YAMADA, SENIOR MARKET ANALYST, KABU.COM SECURITIES, TOKYO
“For us traders, this marks the arrival of a new era. It feels like the stock market is telling us that we’ve finally escaped from deflation and a new world has opened up.
“Compared with 34 years ago, the make-up of the stock market is totally different. Today, looking at the Nikkei average as a profitable security, it’s still quite easy to buy. 39,000 is just a waypoint.”
JAMIE HALSE, PORTFOLIO MANAGER, PLATINUM ASSET MANAGEMENT, SYDNEY
“There are clear fundamental drivers for this rally and I think those drivers can support further gains going forward. We’re still in the early innings of the reforms of corporate governance and capital allocation.
“With growing cash returns to shareholders, I can see the market potentially heading higher.”
BART WAKABAYASHI, BRANCH MANAGER, STATE STREET, TOKYO
“We’re approaching bubble status here. But interestingly, our custody data isn’t showing aggressive buying of Japanese equities by real-money investors. I would tend to think that there’s a lot of local money. Maybe the NISA initiative has had a positive effect.
“I’m not in any way denying that there’s foreign money flowing into Japan, but I think the foreign investment portion of what has been reported may be a bit overblown. Living in Tokyo, it feels like a bubble, particularly if you look at real estate.”
RYOTA ABE, ECONOMIST, SMBC, SINGAPORE
“It’s good news, but I think that there is a strong tailwind from Nvidia (NASDAQ:)’s strong results. Looking forward, I guess Nikkei will be volatile in the short term because of battles between profit-takers and those who expect it to go higher to 40,000. However, I assume buying pressures are stronger than selling.
“Weak yen will help Japanese firms improve their financial results in the next quarter, and it is also good news that more and more Japanese firms decide to hike wages more than the last year.”
YUICHI KODAMA, CHIEF ECONOMIST, MEIJI YASUDA RESEARCH INSTITUTE, TOKYO
“The first word that came to my mind is ‘finally’. Finally, it surpassed the bubble-era high after 30-plus years. But Japan today isn’t ‘bubbly’ at all – it’s hardly overvalued. The momentum for further rise is there. It will head to 40,000 yen levels next.”
MATT SIMPSON, SENIOR MARKET ANALYST, CITY INDEX, BRISBANE
“The Nikkei made its inevitable run to 39k and now trades above it by a cat’s whisker. But I always remain sceptical of such breaks of big numbers as they can suck in the late comers, only to find they have been ‘caught short’ at a record high before a volatile shakeout ensues. Call me a sceptic, but I never trust the first break. Even if it does show the potential to eventually trade higher.”
TONY SYCAMORE, MARKET ANALYST, IG, SYDNEY
“The Nikkei has forged its way into blue-sky territory and appears increasingly comfortable with the idea that BOJ policy normalisation is imminent, which reduces the chance of a potential correction from that direction.
“I expect the 40,000 level to become the market’s next objective for the Nikkei. If momentum names really start to get involved and add to positioning on the break of the 1989 high, we could see a blow-off type move in the short term towards 42,000.”
RICHARD KAYE, PORTFOLIO MANAGER, COMGEST, TOKYO
“The big constituents of the Nikkei are in a strong situation – Fast Retailing establishing its brand in Asia, Tokyo Electron ahead of a major upswing in semiconductor spending, Advantest winning share in Nvidia chip testing, KDDI (OTC:) benefiting from a rationalisation of mobile tariffs and an expansion of its business, Toyota (NYSE:) winning share thanks to its hybrid strategy. And, it is very unusual that such favourable circumstances for all these Nikkei constituents coincide.
“Japan has two major differences with every other market: its currency is at a multi-decade low and widely assumed to be an asymmetrical bet as soon as the yield gap with the U.S. narrows, and its domestic investor base includes some of the world’s largest investors like Japan Post Bank but has been dramatically underweight its own market for 30 years.
“I think both of those factors… could power the Nikkei beyond what valuation and earnings analysis alone might suggest.”
KYLE RODDA, SENIOR MARKETS ANALYST, CAPITAL.COM, MELBOURNE
“It’s been an almost perfect mix of factors pushing Japanese equities to record levels. The Nikkei has been the quintessential soft-landing trade, requiring a resilient global economy and subsequent lower yen, along with a softening global inflation pulse and subdued volatility in rates markets to push higher.”
ILAN FURMAN, CHIEF INVESTMENT OFFICER, BRIDGEWISE, LONDON
“The rally in the Nikkei index has been partly attributed to flows diverted from China, amid investors’ concerns around China’s faltering economy and stock market crush.”
“The performance of Japanese equities is quite diversified across sectors, suggesting that investors are not focused on China proxy names or sectors, but actually looking to diversify away.”
SHOKI OMORI, CHIEF JAPAN DESK STRATEGIST, MIZUHO SECURITIES, TOKYO
“The Nikkei will continue to rally, with foreign investors expecting domestic investors to support Japanese equities via the new NISA programme. The premium that Japanese stocks offer and aggressive ‘animal spirit’ buying will push Japanese equities up. On top of that, the more Chinese data comes out weak, the more Asian money will flow into the Nikkei.”
DAN HURLEY, PORTFOLIO SPECIALIST FOR JAPANESE AND EM EQUITIES, T. ROWE PRICE, LONDON
“The market drivers are very different to those compared to 1989-90; back in the late 80s, the rally was driven by very high land prices and great exuberance in terms of investors overseas and domestically – Japan was 45% of MSCI world, today it is just 6%.
“Back in 1989, the Nikkei traded on an incredible 61x P/E (price to earnings), today it is just 15x P/E, broadly in line with the long-term average of 14x. The price-to-book ratio (P/B) was 5.6x in 1989, today it is 1.4x. No signs of a bubble today.”
ANDREW SHEETS, GLOBAL HEAD OF CORPORATE CREDIT RESEARCH, MORGAN STANLEY, LONDON
“We don’t think positions on Japanese shares are overcrowded. The next challenge is that so far, the equity strength has coincided with a weak currency. That will be the next test, can the market stand on its own two feet if the currency moves sideways?
“There are scenarios where the yen strengthens modestly and that’s good for some sectors. We have a favourable outlook for Japan stocks.”
BRUCE KIRK, CHIEF JAPAN EQUITY STRATEGIST, GOLDMAN SACHS, TOKYO
“When the TSE re-started its corporate governance focus in late January last year, the Nikkei was more than 40% away from these all-time highs and there was a lot of scepticism about its chances of success. For the TSE to have improved investor perceptions about Japan this much in such a short period of time is absolutely remarkable.”
