What changed in the Japanese economy to trigger the surge in stocks?
Japanese stocks look cheap because of the weak yen, a boon for exporters who make their profits overseas. Significant changes in the corporate sector have also given shareholders more rights, allowing them to lobby for favorable changes to their securities.
And unlike other parts of the world, rising inflation in Japan has recently been seen as a sign that things are moving in the right direction, after decades of falling prices and sluggish economic growth that discouraged individuals and businesses to spend.
Japanese stocks have also benefited from the economic slowdown in China, where economic growth has slowed under the weight of the housing slump and a host of systemic and policy challenges. Chinese markets have recently been trading at lows not seen since the 2015 debacle.
Foreign investors play an important role in the rise of the market.
Foreign investors have been enthusiastic buyers of Japanese stocks, pumping a net $14 billion into the market in January, according to Japan Exchange Group data, a sharp change from the roughly $3 billion they were withdrawn in December.
Corporate profits are high, which is another reason why investors invest in Japan. Profits of major Japanese companies are expected to increase by more than 40% in their latest quarterly results, according to Goldman Sachs. The biggest companies, like Toyota and SoftBank, also reported some of the biggest earnings surprises, the bank’s analysts noted. Toyota recently reached a record stock market value for a Japanese company of around $330 billion, surpassing the mark set in 1987 by telecommunications conglomerate NTT.
“Skeptics continue to claim that Japan never changes and foreigners are always disappointed, so get out now,” Goldman analysts wrote. But they said the recent rise in stocks appears less exaggerated than in previous rallies that failed.
According to a survey of fund managers conducted by Bank of America, buying Japanese stocks is the third most popular trade this year, but it is still far from the top two: betting against the Chinese stock market and buying the group of giant technology stocks, such as Apple and Microsoft, known as the “Magnificent Seven”.
What will the Bank of Japan do next?
Economic growth in Japan remains fragile. Figures released last week showed the country’s economy contracted unexpectedly in the fourth quarter, compared with a 3.1 percent increase for the United States.
While much of the world has raised interest rates to combat inflation, Japan has kept them low to try to fuel it, preferring to intervene in markets to prevent its currency from falling. weakens too quickly or government bond yields rise too sharply.
With growth just beginning to recover, the central bank is trying to determine when it would be appropriate to start raising interest rates – to support its currency – without completely stamping out inflation.
Further complicating matters is the economic impact of the earthquake that struck the Noto peninsula on the country’s west coast in January. Japan’s economy would also be vulnerable if much of the rest of the world began to slow down.
For now, economists expect the central bank to raise interest rates into negative territory, but keep them at zero for the rest of the year.
