Japan’s stock market has finally hit a new all-time high after 34 years.
The Japanese economy roared during the 1980s, fuelled by a rapid expansion of advanced manufacturing. As it climbed to the status of the second biggest economy in the world its stock market reached a peak in December 1989.
That was as good as it got though. The country spent decades languishing with little to no growth. Things have improved a lot in recent years. Japanese shares are now reflecting this.
In this article, we cover:
- Why did Japan do so well in the 1980s?
- What made Japan’s economy struggle for so long?
- Why has Japan’s stock market risen so much recently?
- Will Japan’s stock market keep rising?
- How to invest in Japanese stocks
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Why did Japan do so well in the 1980s?
Japan experienced what was dubbed an economic miracle during the 1980s. During this period it experienced rapid economic growth and development, fuelled by advanced manufacturing.
This was enabled in part by investment from America. Export demandin the West for the goods Japan was making was also crucial. Technology transfer from American companies to Japanese firms significantly accelerated the process. Improvements to the freedom and efficiency of Japan’s banking sector was another important catalyst.
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What made Japan’s economy struggle for so long?
There were multiple factors behind Japan’s slump into the economic doldrums. The country entered what have been dubbed the lost decades around 1990.
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The economy slowed down to a crawl, in stark contrast to the boom of the 80s. It was initially triggered when rising interest rates popped the asset price bubble that had developed due to reckless lending by banks, coupled with over-exuberant investors. This crushed confidence in the economy both domestically and abroad. It lead to a stock market crash that has taken until now to fully recover.
Why has Japan’s stock market risen so much recently?
Japan’s leading stock index, the Nikkei 225, finally hit a new record high of 39,000 this year.
The question for prospective investors is whether this symbolic breakthrough will be sustained over time or is just a short-term spike.There are fundamental reasons for the improved fortunes, rather than simply being a fleeting shift in sentiment.
Chern-Yeh Kwok, deputy head of Asia Pacific equities at Abrdn, explained: “Foreign investors have been net buyers of cash equities, for seven straight weeks through the second week of February, bringing their total net buying to ¥2.7 trillion.
“Domestic corporate results have been a tailwind, with Japanese companies delivering better-than-expected third quarter results and earnings forecasts being revised upwards,” Kwok continued.
He also noted that Japaneseyen weakness has been supportivefor stocks.“While many expect the yen to appreciate against the dollar in 2024 as the Bank of Japan raises rates while the US Federal Reserve cuts rates, the yen weakened from ¥143 yen to the dollar at the start of January to around ¥150 yen, prompting investors, especially macro hedge funds, to short the yen and go long on Japanese stocks.”
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Corporate governance reforms
Underpinning the strong gains for the Nikkei 225 are corporate governance reforms. This refers to how well companies are being run, particularly in terms of working in the interest of shareholders.
Japan had for decades suffered from a lack of good corporate governance, relative to American and European companies. Many companies had secretive, complex senior management processes. This was often perceived as focused on preserving the status quo and advancing the interests of company executives, rather than shareholders. This has changed significantly over recent years and more progress is expected.
“It is encouraging that Japanese corporates continue to place a strong emphasis on profitability, alongside the return of excess capital to shareholders,” said Kwok. “This has been accelerated by the Tokyo Stock Exchange proposals for reforms.
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“Increasingly, companies have embraced measures such as return on invested capital and return on equity, and they have been divesting assets that do not meet their hurdle rates. Companies are also setting targets on reducing cross shareholdings and using these proceeds to reinvest in their businesses or to reward shareholders.
“We think that such moves by regulators and companies are key in reforming the corporate governance landscape in Japan for the better,” he continued. “Judging from capitalflows and the market run-up since the announcement of the TSE reforms, it would appear that investors are taking to such positive measures and the general governance trajectory.”
Will Japan’s stock market keep rising?
There should certainly be more benefits from the ongoing corporate governance reforms to come. That does not guarantee share price rises, of course.Much will depend on the prevailing economic conditions, in terms of inflation and interest rates.
“We remain optimistic on the market, due to several positive structural changes currently under way in Japan,” said Kwok. “Most notably, as inflation has continued to set in, we believe that the deflationary mindset is gradually changing.
“Higher prices are becoming more entrenched, resulting in a firmer domestic outlook for companies. This is in contrast to the recent past, when rising costs could not be fully offset by passing on higher prices to end customers.
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“Meanwhile, a shortage of labour is putting upward pressure on wages, raising the possibility of the economy entering a virtuous cycle of growth,” Kwok added. “Geopolitics is also putting Japan in the spotlight; ‘friend-shoring’ has led to rising investment from global semiconductor companies in the country. These all bode well for the prospects of Japan’s companies and its economy.”
Diversification
A major reason why British or America investors may choose to invest in Japan is diversification. As an asset class, Japanese equities offer different characteristics from US or UK shares. The shares may also move differently to counterparts around the world. This offers investors what is known as diversification, and is a crucial part of a good investment strategy.
How to invest in Japanese stocks
Should you wish to invest in Japanese stocks there are a couple of choices for retail investors.
Buying individual Japanese stocks is possible from the UK via some brokers and platforms. There are also some Japanese companies which have a listing in the UK or US which means they are accessible to UK investors.
Active versus passive
Picking individual stocks carries significant risk and requires expert knowledge. Most investors will be better served by buying a fund that offers exposure to the asset class.
These fall into two broad categories, active and passive. An actively managed Japanese equities fund or investment trust will be run by fund managers who pick they stocks they believe will perform best against a stated investment aim or target. The fund may perform better than the broad Japanese stock market, or it could do worse. Either way, you can expect to pay a significant fee to the managers.
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The other option is a passive fund or exchange-traded fund (ETF). These will give you a broad exposure to Japanese stocks across the whole market. Some will do this by simply tracking an index such as the Nikkei.
Your returns will be the broadly the same as the asset class as a whole, whether good or bad. There will be a fee, but it will be a fraction of the amount charged by active funds.
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