Recently, Japan’s stock markets reached record highs not seen since the 1990s, which has caused some to recall the nation’s notorious “bubble economy” time, which came before its following “lost decade.” The Nikkei 225 index reached the 30,000 threshold in late May, a feat not accomplished for 33 years. It is crucial to keep in mind that the benchmark index is still around 18% below the 38,915 all-time high it attained on December 29, 1989.
Despite parallels in stock market performance, experts contacted by CNBC have played off worries about a recurrence of the catastrophe of the 1980s. Dong Chen, director of macroeconomic research at Pictet, underlined that the present scenario Japan is in is different from what it was in the late 1980s and that it is difficult to make the case that it is comparable. This opinion was supported by Ryota Abe, an economist of Sumitomo Mitsui Banking Corporation, who said that there are no indications of an economic bubble in Japan. Although Tokyo’s real estate prices have skyrocketed and the country’s inflation rates are at multi-decade highs, these developments are localized and do not represent a general trend.
Japan’s strong economic growth, low unemployment, and simple access to finance throughout the 1980s fueled the stock market upswing. Low borrowing costs stimulated speculation, which in turn created an asset price bubble that eventually burst in 1990 when the Bank of Japan tightened monetary policy. As a result, equity and land values fell, and the nation began what is known as the “lost decade,” a protracted period of economic stagnation.
Experts contend that the recent stock market rise is fundamentally different, however. Abe emphasized a number of elements that helped the Nikkei outperform other indices. First off, Japanese businesses have reported better-than-anticipated financial performance as a consequence of the weaker yen making their goods more affordable. Additionally, Japanese corporations’ share buybacks have increased to the greatest level in 16 years as a result of the Tokyo Exchange Group’s emphasis on improving capital efficiency.
Japan has also seen significant structural changes during the last ten years, notably as a result of the “Abenomics” economic policies of former Prime Minister Shinzo Abe. These reforms, which included a rise in the money supply, greater public expenditure, and altered regulations, intended to make Japan more competitive abroad. Notably, business expenditure in Japan has increased, signaling a change from the previous “balance sheet recession” mindset that prioritized debt reduction.
Due to the nation’s economic recovery and major improvements in the business climate, such as faster wage rise, foreign investors have shown increased interest in Japan. Opportunities for Japan are also created by the diversification of global supply chains away from China, notably in industries like semiconductors.
The decisions taken by the Bank of Japan will have a considerable impact on how the Japanese stock market develops in the future. Due to increasing inflationary pressures, new BOJ governor Kazuo Ueda is anticipated to gradually move away from an ultra-dovish monetary policy; nonetheless, analysts predict that the market may see a short-term correction or halt. However, the argument for investing in Japan over the long run is still strong, thanks to rising corporate profits and continuing corporate governance reforms.
Many foreign investors continue to hold underweight positions in Japanese shares despite the recent recovery. The picture is still favorable as the year goes on due to the projected continuance of corporate share buybacks and the robust demand for Japanese equities.