Why are Japanese stock prices rising?

Japan stock market bull run may make the Nikkei 225 cross its all-time high levels. Nikkei 225 all-time high level of 38915 was reached on December 29, 1989.

Nikkei 225 is already up by 20% over the last one-year and the index has gained over 24% so far in 2023. International investors are set to increase their exposure to Japanese stocks or consider including them in their portfolios for the first time this year as the country’s stock markets reach levels not seen since 1990. This is the bullish analysis of Nigel Green, CEO and founder of deVere Group, one of the world’s largest independent financial advisory, asset management, and fintech organisations, as the Nikkei 225 has breached the 30,000 mark, something that’s not been seen in 33 years.

Nigel Green says: “The reason is that the world’s third largest economy is experiencing inflation that reached a four-decade high in February and continues to run hot. Sharp price gains are rarely desirable, but Japan is an exception after bouts of deflation since the late 1980s and early 1990s.”

Japanese stock market is celebrating the return of inflationary winds in the economy. Japan’s core consumer inflation in May rise beyond expectations, as the index that excludes fuel costs had its strongest annual growth in 42 years.

Green explains why the return of inflation in Japan is a welcoming sign for bullish sentiments.

Japan has been grappling with a persistent problem of low inflation and deflation for several decades for four main reasons.

“First, it has an aging population and a declining birth rate, which has led to a shrinking workforce and reduced consumer spending. With fewer people entering the workforce and spending less, there is lower demand for goods and services, resulting in stagnant prices,” notes the deVere CEO.

“Second, Japan has experienced prolonged periods of economic stagnation, characterized by sluggish growth and weak consumer and business spending. This has limited the potential for inflationary pressures to build up.

“Third, the country has one of the highest debt-to-GDP ratios among developed countries. To manage this debt burden, the government has implemented accommodative monetary policies, including low-interest rates and quantitative easing. While these policies aimed to stimulate economic growth, they have not translated into significant inflationary pressures.

“And fourth, Japan has faced structural challenges in its economy, such as excess capacity in certain industries, weak productivity growth, and limited wage increases. These factors have contributed to a lack of upward pressure on prices.”

According to Shrey Jain, Founder SAS Online – India’s Deep Discount Broker, there are more fundamental reasons – One factor contributing to the rise of Japanese stocks is the focus on corporate governance. Under mounting pressure from both domestic and international investors, management teams have undergone a notable shift in their mindset and are now responding more genuinely to shareholder activism.

Additionally, listed companies have achieved financial results that surpassed expectations, partly due to a weakened yen. This depreciation has made Japanese products comparatively more affordable than their competitors, resulting in stronger economic performances for Japanese companies in foreign markets.

Japan’s stock markets have risen to levels not seen since 1990 when the country was in the midst of its “bubble economy.” Analysts claim that this time is distinct from the last. There are “structural changes” in Japan, yet real estate prices have not increased dramatically nationwide. A market pullback or perhaps correction may not be ruled out many experts anticipate a strong long-term investment case for Japan.

Warren Buffett seems to have caught the rising wedge right at the early stages of Japan stock market bull run. S. K. Hozefa, CEO Tradeplus Online says, “Warren Buffett’s recent decision to increase his investments in Japanese trading houses has undoubtedly made waves in the market. Berkshire Hathaway’s significant stake of 8.5% in the largest trading houses, including Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo, further solidifies Buffett’s belief in the prospects of these companies. Notably, Buffett’s initial investment of 5% in 2020 has already yielded a staggering profit of over $4 billion.”