(Bloomberg Opinion) — Thirty-eight thousand nine hundred fifteen point eight-seven.
It’s a number seared into the mind of any long-term Japan stock-watcher: The Nikkei 225’s all-time high, recorded on the last trading day of 1989. The nation’s economic bubble had already begun to burst, and early that next year the index tumbled. The S&P 500 has gained some 1,200% since then, while the Nikkei has yet to scale those heights once more.
But after an unexpectedly vigorous start to 2024, the blue-chip index suddenly finds itself less than a 10% gain away from finally overcoming that record. Everyone from local retail traders to Chinese investors seeking refuge from the underperforming mainland market are buying into Japan at the start of 2024. Though many analysts expected a new Japan record sometime this year, few would have expected that — at least at the current pace — it could come by the end of this month.
Not only did the earthquake that struck the Noto peninsula on New Year’s Day fail to burst the enthusiasm from 2023, the disaster might ironically have lent support to Japanese markets. Foreign investors were quick to note how soon much of the afflicted region was back on its feet, with the Shinkansen bullet train line closest to the affected areas up and running in less than 24 hours — a clear demonstration of Japan’s resilience. Others have speculated the quake also further pushes back any chance of a sudden interest-rate hike by the Bank of Japan.
This week also saw another big step toward surpassing 38,915.87. Monday’s eagerly anticipated release of the Tokyo Stock Exchange’s “name and shame” list — highlighting which firms have publicized steps they’re taking to improve their corporate value — should give heart to those who think 2024 will mark the end of stocks’ lost decades.
At first glance, the fact that some 60% of prime-listed companies — in theory, corporate Japan’s best-in-class — have so far failed to present plans to improve their share prices might seem disheartening. The likes of Toyota Motor Corp. and Uniqlo parent Fast Retailing Co. were among them. Worse, nearly 90% of companies on the catch-all standard market have yet to disclose their plans.
But the absences also show that the TSE’s water-torture campaign that slowly applies pressure to improve still has a long way to run. Nearly half of the 1,655 prime members trade below book value, compared with just 3% of the S&P 500. Encouragingly, those firms were the most likely to have disclosed their attempts to boost their stocks.
And Japan Exchange Group Inc. Chief Executive Officer Hiromi Yamaji has said that he wants value to be improved over the long-term, rather than juiced by temporary buybacks, and likened Japan’s until-recent malaise to the “death of equities” period in the US that preceded the 1980s Reaganomics boom. The pressure is definitely working; Jefferies analysts termed it a “giant leap towards structural transformation” of the Japanese market. For so much of the market to be focused on improving corporate value is simply unheard of.
The groundwork for all this was laid nearly a decade ago, during the Abenomics program of former premier Shinzo Abe. But as with much in Japan, hopes for early success were too high — and later improvements went unnoticed. Yamaji himself is a key player, seemingly far more committed than his predecessors to nudging and nagging firms into compliance. Those that don’t want to be listed can take advantage of Japan’s cheap money to take themselves off the market.
And the campaign from the Tokyo bourse continues. Next year, it will reportedly at long last require prime-listed firms to make corporate disclosures in English as well as Japanese, something that has been woefully lacking for most companies, despite Tokyo’s frequent attempts to promote itself as an international financial hub.
There are plenty more encouraging signs. When the BOJ does lift rates back to zero, some might get cold feet, but everyone agrees that’s now unlikely to happen before April at the earliest. The market has also finally become comfortable with the idea that even if the BOJ abandons its negative-rate experiment, it doesn’t follow that it will embark on a rapid hiking cycle like other central banks. Warren Buffett himself is also indirectly helping: The sogo shosha trading houses he invested in back in 2020 are among the best performers in the country this year, with traders noting remarks from Sumitomo Corp.’s CEO that Buffett is continuing to increase his stakes in the five firms. (Don’t get too carried away; even the Oracle of Omaha is required to submit a regulatory filing for every 1% increase in his stake.)
And then there’s the news Wednesday that the market is so in demand among Chinese investors that the largest onshore exchange-traded fund tracking Japanese stocks was temporarily paused due to a surge in demand. In recent years Japan has benefited from its position as an investing alternative to China, but until now it’s rarely been Chinese stockholders themselves holding this view. It’s a meaningful change if even the mainland is catching up to the notion that Japan isn’t an investment wilderness.
Of course, there’s no guarantee that 2024 will be the year 38,915.87 crumbles. Those same longtime stock watchers (fewer each year) have seen this euphoria before — and know how quickly the tides can turn, especially if Japan’s ponderous pace of change doesn’t align with an overly bullish sentiment. A rout in Chinese stocks, a potential recession and regional tensions are all concerns. But if there was ever a moment for the country to record a new high watermark, this might be it.
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Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.
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