Nikkei finds its mojo again breaking historic highs

Japanese markets stood out this week with the Nikkei 225 Index hitting a new all-time high, breaking a record set over three decades ago. This milestone was achieved amidst Japan’s steady growth and improving corporate profitability, although the path was not without its challenges, as evidenced by a brief losing streak halted by a rally ahead of a national holiday.

The Nikkei has re-found its mojo but it’s been a long time coming. The Japanese stock market peaked in December 1989, and in the years since the Nikkei has been unable to break higher. But the recent red-hot rally in Japanese stocks has helped the index finally beat the previous record set 34 years ago.

Regular readers of The Armchair Trader may recall we tipped Japan as a market to watch in 2024, as part of our New Year forecasts.

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Record quarterly profits from Japanese companies

The Nikkei has been buoyed by another wave of excitement for the prospects for the tech sector, coming off the back of Japanese companies logging record quarterly profits. The weaker yen has helped exporters like Toyota, Honda and Sony, with strong demand for vehicles, machinery and computer chips from around the world.

Exports surged by 12% in January, inbound tourism is making a comeback and after years of deflation, it’s finally in the rear-view mirror.

The Nikkei’s performance has also been boosted by corporate governance reforms to make businesses more accountable to shareholders which appear to have enthused investors, including Warren Buffett who has been bullish towards Japanese stocks.

Economic indicators from Japan presented a mixed picture, with strong machinery orders and exports contrasting with a disappointing manufacturing PMI. The Bank of Japan’s optimistic stance on inflation and wages added a layer of confidence, suggesting a possible shift away from prolonged ultra-loose monetary policies in the future.

Undesired milestone: Japanese economy now smaller than Germany

The gradual decline of the Japanese economy also manifested itself recently however as it officially slumped from the 3rd to the 4th largest global economy, usurped by Germany.

The undesired milestone was a result of GDP data that saw the economy contract by 0.1% in Q4 2023 in real terms. The economic print came as a surprise to many economists, given the consensus estimates were for a 0.3% increase. Instead, the second consecutive negative GDP print means that the Japanese economy is in a technical recession. This does not seem to be slowing the Nikkei down however.

“Japan’s economic volatility is not news,” says Jack Colreavy, associate director for corporate finance at BPC in Australia. “The economy has been in a gradual state of decline for decades primarily because of unfavourable demographics. Japan has a rapidly ageing population, low birth rates, and low immigration levels contributing to a gradual decline in an economy that was once the 2nd largest and touted to overtake the United States at one stage.”

Colreavy says an explanation for the Nikkei’s performance can be attributed to the weak-yen boosting foreign earnings of Japanese companies and the fact that the Bank of Japan conducts quantitative easing which includes purchasing Japanese stocks.

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