Japan stocks are roaring back. This rally may be different from the 1990’s ‘bubble high’

Japan’s
stock
markets
have
been
testing
new
highs
not
seen
since
1990
—
evoking
memories
of
its
“bubble
economy”
right
before
the
country
plunged
into
its
so-called
“lost
decade.”

Since
late
May,
the


Nikkei
225
has
breached
the
30,000
mark,
a
feat
not
seen
in
33
years.

To
be
clear,
the
benchmark
index
is
still
about
18%
below
its
all-time
high,
when
the
Nikkei
hit
38,915
on
Dec.
29,
1989.

The
bubble
burst
after
the
Bank
of
Japan
tightened
monetary
policy
at
the
start
of
1990,
triggering
the
collapse
of
equity
and
land
prices.
By
September
that
year,
the
Nikkei
index
crashed
to
just
half
its
record
high.

But
analysts
who
spoke
to
CNBC
said
Japan
is
not
headed
for
another
crash
like
the
one
during
the
bubble.

“It
is
very
difficult
to
argue
that
Japan
is
facing
the
same
situations
as
in
the
late
1980s,”
said
Dong
Chen,
head
of
macroeconomic
research
at
the
private
bank
Pictet.

Ryota
Abe,
an
economist
with
the
global
markets
and
treasury
department
at
Sumitomo
Mitsui
Banking
Corporation,
shared
the
same
sentiments.

“We
do
not
see
a
bubble
in
the
economy,”
he
said,
pointing
out
that
while
real
estate
prices
in
metropolitan
Tokyo
have
skyrocketed
and
inflation
rates
are
at
the
highest
in
decades,
it
is
not
a
nationwide
phenomenon
but
is
only
seen
in
some
areas
in
Tokyo.

Furthermore,
“current
high
inflation
rates
in
Japan
are
due
to
higher
import
costs
on
the
back
of
a
weaker
yen
and
high
commodity
prices.
We
cannot
call
it
a
bubble,”
Abe
added.

Rapid
growth
in
Japan’s
economy,
low
unemployment,
and
easy
access
to
credit
in
the
1980s
powered
the
stock
rally
at
that
time.

The
Bank
of
Japan’s
interest
rates
then
were
at
2.5%
—

its
lowest
since
the
central
bank
transited
to
a
floating
exchange
rate
in
the
early
1970s.

Low
borrowing
rates
fueled
speculation,
which
drove
up
stock
markets
and
led
to
an
asset
price
bubble.

As
the
BOJ
raised
interest
rates,
the
world’s
third
largest
economy
plunged
into
a
decade-long
crisis
that
came
to
be
known
as
“Japan’s
lost
decade”
—
a
period
of
slow
to
negative
economic
growth
that
continues
today.

Over
the
last
two
decades,
Japan’s
GDP

grew
by
an
average
of
0.7%
from
1991
to
2011,
and
from
2011
to
2019,

Japan’s
GDP
grew
just
under
1%.

The
stock
market
rally
this
time
is
different,
said
Abe,
and
the
outperformance
of
the
Nikkei
can
also
be
attributed
to
a
few
other
factors.

First,
listed
firms
have
posted
better-than-expected
financial
results,
thanks
to
a
weak
yen,
which
makes
Japanese
products
comparatively
cheaper
than
their
competitors.

As
a
result,
Japanese
companies
have
seen
stronger
economic
performances
overseas.

In
addition,
more
Japanese
firms
have
bought
back
their
stocks
in
response
to
the

Tokyo
Exchange
Group’s
push
for
greater
capital
efficiency.

Nikkei
reported
in
March
that
share
buybacks
by
Japanese
companies
was
set
to
reach
their
highest
level
in
16
years.
 

Japan
has
seen
“some
structural
changes”
in
the
the
past
decade
too,
led
by
the
late
Prime
Minister
Shinzo
Abe
who
took
office
in
2012
and
implemented
his
so-called
“Abenomics”
policies,
Chen
pointed
out.

The
prime
minister’s
signature
economic
policy
is
based
on
the
“three
arrows”
of
increasing
money
supply,
increasing
government
spending,
and
economic
and
regulatory
reforms
to
make
Japan
more
globally
competitive
—
Chen
said
the
third
arrow
may
finally
be
seeing
some
results.

Most
notably,
he
pointed
out,
Japanese
corporate
spending
has
been
ticking
higher,
which
means
companies
are
investing
again.

A

June
23
report
by
Nikkei
found
that
capital
investment
by
Japanese
companies
is
set
to
hit
a
record
31.6
trillion
yen
($221.03
billion)
in
the
2023
fiscal
year.

The
report
said
domestic
investments
—
at
around
two-thirds
of
the
total
—
are
expected
to
see
double-digit
percentage
growth
for
the
second
straight
year,
while
overseas
investment
could
increase
by
22.6%,
marking
a
third
straight
year
of
double-digit
expansion.

Chen
said
it
means
Japanese
companies
may
have
broken
out
of
the
so-called
“balance
sheet
recession”
mentality,
where
households
and
businesses
aimed
to
reduce
debt,
instead
of
engaging
new
investment.

“Now
we’re
seeing
the
opposite,
meaning
they’re
actually
investing
because
they
haven’t
invested
for
so
long
…
we
think
this
trend
probably
can
last
longer.”

Foreign
investors
have
also
taken
a
renewed
interest
in
the
world’s
third
largest
economy.

Japan’s
economic
recovery
has
started,
and
there
have
been
notable
changes
in
the
business
environment
—
such
as
higher
wage
growth
in
2023,
Abe
from
SMBC
pointed
out.

Overseas
investors
have
found
opportunities
in
Japan,
thanks
to
the
lower
value
of
the
yen
and
possible
higher
upside
potential
for
equities.

Billionaire
investor
Warren

Buffet’s
bullish
outlook
on
Japanese
equities
has
also
piqued
investor
interest
in
Japan.

There
are
also
external
factors
boosting
optimism
about
Japan.

Global
companies
are
now
diversifying
supply
chains
away
from
China,
and
Chen
said
Japan
could
benefit
as
one
of
the
destinations
to
reshore
supply
chains,
“particularly
in
the
very
high
end,
more
technologically
dense
sectors
like
semiconductors.”

“All
these
things
are
pointing
to
the
right
direction,
we
think
that
there
are
reasons
to
be
more
structurally
positive
about
Japan
than
before,”
he
added.

The
Bank
of
Japan
will
be
a
key
player
in
whether
or
not
the
stock
market
will
continue
to
power
ahead.

As
mentioned,
when
the
BOJ’s
tightened
its
monetary
policy
at
the
start
of
1990,
Japanese
markets
tumbled.

Now,
with
new
BOJ
governor
Kazuo
Ueda
expected
to
walk
the
BOJ
out
of
its
ultra-dovish
stance,
is
such
a
future
ahead
for
the
market?

Oliver
Lee,
client
portfolio
manager
at
Eastspring
Investments,
a
subsidiary
of
British
insurer
Prudential,
told
CNBC
that
with
inflationary
pressures
building
in
Japan,
monetary
policy
could
become
“marginally
tighter”
in
the
next
12
months.

“Short
term
technical
indicators
look
elevated
and
it
would
probably
be
healthy
to
see
a
pause
in
the
market,
or
even
a
small
correction,”
Lee
predicted.

However,
the
long-term
investment
case
in
Japan
remains
robust,
Lee
said,
citing
improved
underlying
corporate
profitability
and
ongoing
corporate
governance
backed
by
institutions
like
the
Tokyo
Stock
Exchange.

Most
notably,
Lee
pointed
out
that
most
international
investors
are
still
underweight
Japan
in
their
portfolios.

With
the
trend
of
corporate
share
buybacks
expected
to
continue,
he
said
demand
for
Japanese
equities
should
remain
strong
heading
into
the
second
half
of
the
year.