At a time when the rest of the world’s economies and markets are bleeding from rising inflation and interest rates, Japan’s stock markets are soaring, with equities reaching their highest level in 33 years. What is causing Japan’s stock market to soar?
The broad Topix index of Japan increased over 0.6% on Tuesday, bringing the year’s gains to 13.9%, close to the greatest level since Japan’s renowned market bubble burst in the closing days of 1989. The Nikkei 225 index has gained more than 16% since the beginning of the year and is now close to a post-bubble high, making Japan one of the world’s hottest markets.
The recovery in Japan’s markets follows a series of false dawns and years of anaemic returns that convinced many fund managers to avoid Japan and its complicated corporate structures, especially with rich returns available elsewhere.
In contrast, India’s benchmark Sensex has merely increased by 0.64 percent since January 2023, reaching 61,729 on Friday (May 19). The index gained only 2.80 percent in the calendar year 2022. Even as Japan’s markets battled to recover in recent years, US shares have more than doubled.
The Japanese stock exchange has announced that companies trading below book value will be required to submit capital enhancement plans beginning this spring. While this is simply the latest in a long line of such TSE regulations, corporate and market reaction has been unexpectedly swift. After decades of underwhelming returns, stocks rose on increased expectations of stronger governance standards and a more serious consideration for shareholders. Stock investment was also boosted by recent positive earnings results from Japanese corporations.
Furthermore, Japan’s economy emerged from recession and grew faster than projected in the first quarter, as a post-COVID consumption bounce countered global headwinds, bolstering expectations for a long-term recovery. Its economy expanded by 1.6% year on year in January-March, greatly above market expectations of a 0.7% increase and marking the first increase in three quarters.
The corporate governance claims levelled by the US-based Hindenburg against the Adani group in February this year shook Indian markets. While market regulator Sebi has taken action against several mutual fund institutions for unlawful front running and corporate insider trading, industry experts believe this is only the tip of the iceberg. According to a market watcher, there is a case can be made for Indian corporations and fund houses to strengthen governance standards.
While India saw only $ 2 billion in foreign inflows in 2023, international investors poured into Japanese stocks and futures in the last five weeks, with net inflows totaling roughly $30 billion. Foreign investors are justifiably optimistic about the prospect of a historic shift in business priorities.
Japan is profiting from the knowledge that investing in Tokyo is a safe way to acquire exposure to Chinese growth while assuming less geopolitical risk. Only in the last few weeks have Indian markets seen a recovery in foreign inflows. According to an economist, what has encouraged investors is that concerns such as an overseas economic slowdown or the Bank of Japan reversing its ultra-loose monetary policy have not materialised.