Nikkei 225 Shatters Record: Japan’s Market Triumph

The mood was electric in Tokyo’s trading floors as the day drew to a close—a feeling of celebration hanging in the air. For the first time in over three decades, Japan’s premier stock index, the Nikkei 225 (NKY:IND), broke through the roof, scaling past the 39,000-point barrier, a feat last achieved amid the heady days of the 1980s asset bubble.

This climb to new heights crowned the Nikkei as 2024’s global standout, a star performer with a remarkable 17.5% jump just two months into the year, easily outshining the U.S. S&P 500 index, which itself had a respectable 5% increase.

What’s Fueling the Nikkei’s Remarkable Rise?

Several streams converged to propel the Nikkei skyward, signaling a resurgence of the Japanese market. The tumbling yen caught the eye of international investors, including the likes of Warren Buffett, who are now betting big on Japan’s economic future. With diminishing worries about China’s economic commitments, Japan’s export titans have seen their earnings take off.

The boom has also been a result of a novel approach to corporate governance, which has seen a wave of stock buybacks and the elimination of cumbersome cross-shareholdings. With significant investments in cutting-edge industries like semiconductors and artificial intelligence, Japan appears ready to shake off its lingering deflation, which has all contributed to a general sense of optimism.

Confident Markets in the Face of Economic Hurdles

Dan Stringer of Seeking Alpha had an inkling that Japan’s market was set for a rally, as noted in his “Best Idea for 2024” back in December. Stringer pinpointed the allure of the iShares MSCI Japan ETF (EWJ), with its attractive price-earnings ratio, compared to the heftier multiples of the S&P 500. He applauded Japan’s policy changes, which breathed new life into stock valuations and the yen’s worth, but also sounded a note of caution: the risk of policymakers losing confidence in these reforms, especially if the expected wage inflation fails to take off.

Economic Woes vs. Stock Market Success

While stock prices soar, it’s critical to remember that Japan’s economy is wrestling with a recession. The country has seen its position slip in the global economic rankings, with Germany edging past to claim the title of the world’s third-largest economy, a testament to Japan’s currency woes and the challenge of an aging population. But as Stringer points out, an economy’s health and its stock market can tell different stories.

This gap between economic indicators and market performance can be influenced by an array of elements, from monetary policy choices and who owns stocks, to corporate profitability and the forward-looking mood of investors.