What Is Behind the Record Highs of the Japanese Stock Market

The Nikkei stock index, a key benchmark for the Japanese market, surged 2.2% on Thursday, eclipsing a record that had stood for over three decades. The index crossed the 39,000 level for the first time, and this breakthrough marks a significant milestone, coming after years of sluggish growth following the bursting of an asset bubble in 1989.

Read more: The Resurgence of Japan

Analysts point to a confluence of factors contributing to the Japanese market's recent boom. Here are some key contributors:

Corporate Governance Reforms: The Tokyo Stock Exchange (TSE) has been pushing for improved corporate governance in recent years. This includes encouraging companies to focus on shareholder returns through measures like share buybacks and higher dividends. These reforms have made Japanese firms more attractive to foreign investors who previously considered them lacking in shareholder focus.

A Weak Yen: The Japanese yen has depreciated significantly against major currencies like the US dollar. This benefits Japanese exporters as their foreign earnings translate into more yen, boosting profits and investor confidence.

Robust Global Economy: The current global economic climate is relatively strong, contributing to a generally positive sentiment towards equities worldwide. This positive overall trend spills over into individual markets, including Japan.

Read more: 2024 Equity Outlook

Improved Corporate Performance: Japanese companies are finally showing improved financial performance with record earnings in recent quarters. This financial health further fuels investor confidence and market optimism.

Increased Foreign Interest: Foreign investors have played a crucial role in the recent Japan stock market surge. In January, foreign investors purchased Japanese stocks worth 125.2 trillion yen, a figure that is twice as much as what was recorded a year before, data from the Tokyo Stock Exchange shows. Similar to trends observed in the United States, technology firms have been among the biggest beneficiaries of this surge.

Despite the record highs, analysts generally believe that Japanese stocks are currently not overvalued. The Tokyo market's price-to-earnings ratio stands at around 16, in contrast to 23 for both the S&P 500 and the Sensex. For the year 2023, Nikkei 225 witnessed a return exceeding 28%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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