Home » Nikkei Stock Average begins a new journey, returning from “abnormal” to “normal”, reaching highest level in 34 years – Bloomberg

Nikkei Stock Average begins a new journey, returning from “abnormal” to “normal”, reaching highest level in 34 years – Bloomberg

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Nikkei Stock Average begins a new journey, returning from “abnormal” to “normal”, reaching highest level in 34 years – Bloomberg

The Nikkei Stock Average hit a new all-time high for the first time in 34 years. During the bubble period, stocks were bought to the highest levels in the history of the world‘s financial markets, and during the deflationary period that followed, they were sold to the lowest prices in the world. The recent rise in stocks reflects the Japanese economy’s escape from many years of deflation and the positive attitude of corporate managers toward shareholder returns, which is proof that Japanese stocks have returned to normal after an abnormal situation.

While China and other emerging countries achieved rapid growth, Japan, which continued to experience low growth, was overlooked by global investors for a long time. However, as expectations for an end to deflation rise, investors are beginning to factor in the possibility that Japan’s economy is now in an environment where it can achieve stable nominal growth.

Masayuki Murata, general manager of the Sumitomo Life Balance Fund Management Department, said that amidst the change in the inflationary environment, “Japanese companies are in the process of becoming a country with normal inflation, from a contractionary deflation-oriented country, and they still have a lot of potential.” pointed out. He sees this as a step in the transition from a world where fixed costs are reduced because sales decrease, to a world where costs go up but sales also increase.

According to World Bank data, Japan accounted for 37% of the world‘s stock market capitalization in 1989, making it the world‘s largest market, exceeding the United States‘ 29%. However, as Nicholas Smith, chief strategist at CLSA Securities, has pointed out, it is the “biggest bubble in human history.” The market is underpinned by the financial and tech boom, and the market is abnormally high and out of line with the real economy. It is said that 1,000 trillion yen of national wealth was wiped out due to the collapse of asset prices due to the bursting of the bubble, leaving behind a number of problems and contributing to Japan’s long-term stagnation.

Japanese stock market approaches the highs of the 1980s bubble, increasing confidence in ending deflation and corporate reform

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After over 30 years of unraveling the intricately intertwined negative threads, there is a growing possibility that the market is finally being judged from the same perspective as overseas markets. Corporate governance reforms that began under the Abe administration and have gradually permeated Japanese companies over the past 10 years are one of the factors that foreign investors evaluate.

The rise in inflation that followed the Ukraine conflict was initially viewed as a temporary phenomenon by many, but business and consumer sentiment changed as a result of a rush to raise prices on a scale not seen in decades since the oil crisis. This year’s spring labor union is expected to result in a much larger wage increase than last year, and a path to eliminating the deflation that has been a drag on the Japanese economy is becoming clear.

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The Nikkei Stock Average has risen 17% this year, significantly outperforming stock prices in major countries. Many strategists have been raising their stock price targets one after another, as the stock has surpassed the 37,000-38,000 yen high price expected for this year.

Morgan Stanley Securities, which has been the first of the major securities companies to rate Japanese stocks as a “buy” since 2018, has frankly stated that since Abenomics, corporate governance reforms have gradually progressed and profits have steadily increased. He explained that this was a reflection of the results.

“Governance reform takes time. It also took time for global investors to understand it, and we’ve finally reached that point now,” said Jonathan Garner, chief Asia emerging market equity strategist. The company continues to have the largest overweight position in Japanese stocks among major markets.

Even after a significant rise since last year, Japanese stocks remain undervalued. Nearly 40% of companies in the Nikkei Stock Average have price book value ratios (PBR) of less than 1x, and the ratio of companies with PBRs below 1x is overwhelmingly higher than 3% of the U.S. S&P 500 stock index and around 20% of the STOXX Europe 600 index. There are many The average for Japanese stocks as a whole remains at a low level of 1.4 times, which is far behind the US price of 4.7 times.

Reaction risk of “fishermen’s advantage”

However, there are some points that require caution in the future. The inflow of funds from global investors into Japanese stocks to date has been largely due to the “fishermen’s advantage” as a result of the decline in the attractiveness of Chinese stocks, which have suffered from a severe economic downturn, including in the real estate market. If Chinese stocks bottom out, some investment funds may flow out of Japan.

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The real economy has also been stagnant since the second half of last year, and the real gross domestic product (GDP) for the October-December period of last year announced on the 15th showed negative growth for the second consecutive quarter, contrary to expectations, indicating that the country is entering a recession soon. It was a technical recession.

Real GDP declines for second consecutive term, consumption slumps – a damper on expectations for normalization by the Bank of Japan

In addition, Takehiko Masuzawa, head of trading at Phillip Securities’ equities department, said that there was a strong fear of late buying in a market with full momentum, and that the Nikkei 225 index had exceeded a milestone high, and there was a sense of impatience that they had to ride the momentum. “There is,” he pointed out. It cannot be denied that the market, which has diverged from the fundamentals that call for buying mainly in large-cap stocks, could reverse its flow once it stops.

Expectations for governance reform

In order for stock prices to continue to rise despite these concerns, one condition seems to be that investors continue to have confidence in governance reforms. At the request of the Tokyo Stock Exchange, listed companies are being forced to manage their businesses with an awareness of the cost of capital and stock prices, and expectations may continue until around April or May, when companies for the March fiscal year will announce their full-scale financial results. This is because not only the TSE but also activist shareholders are increasingly demanding shareholder returns, and companies may move to buy back their own shares, increase dividends, or engage in mergers and acquisitions (M&A).

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Increasing shareholder returns attract Japanese stock investors, with share buybacks reaching record high this year

Japanese companies, which suffered from bank lending constraints and excessive debt repayments after the bursting of the bubble economy, have become accustomed to hoarding cash amid deflation, and their cash flows are plentiful. Approximately one-third of Nikkei 225 constituents (excluding financial institutions) have cash and other liquidity in excess of interest-bearing debt. This ratio is about twice that of the US S&P 500.

Furthermore, the real effective exchange rate of the yen in the foreign exchange market is at its lowest in half a century since the 1970s, and export profitability for domestic companies is improving. In 1989, when the Nikkei 225 reached its highest market capitalization, the top market capitalization was dominated by banks, but now companies with strong overseas earning power such as Toyota Motor Corporation, Sony Group, Fast Retailing, and Tokyo Electron are in the lead. The diversification of roles is making the market more volatile.

Seiji Nakata, president of Daiwa Securities Group Inc., said, “The fact that the Nikkei 225 exceeded this symbolic figure is proof that Japan has changed significantly in many ways.It is extremely significant.” “From a PER perspective, it’s completely different from what it was during the bubble. The stock price was determined based on calm judgment without any sense of overheating.”

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