“Japan’s Nikkei 225 Hits 35,000 Mark: Optimistic Outlook Despite Short-Term Cautions”
Introduction: In a remarkable turn of events, Japan’s Nikkei 225 index achieved a historic milestone by breaking the 35,000 mark for the first time since February 1990. The rally, which began on January 5, has propelled the benchmark to new 33-year highs, marking a resurgence in the Japanese equity market. While analysts express optimism for the long-term prospects, there are also cautious sentiments regarding potential short-term adjustments. This essay explores the factors contributing to the market rally and the perspectives on its sustainability.
Record-Breaking Rally: Japan’s Nikkei 225 index surpassed the 35,000 mark, reaching levels not seen since February 1990. The achievement is noteworthy, especially considering the challenging economic conditions at the beginning of the year. The broader market, including the Topix, has also scaled new 33-year highs, indicating a widespread bullish trend in Japanese equities.
Long-Term Optimism: Analysts, such as Yeap Jun Rong from IG Asia, view the current scenario as favorable for Japan’s stock market. Rong highlights factors like subdued wage data and weaker household spending, allowing the Bank of Japan to maintain accommodative policies. The ongoing corporate governance measures by the Tokyo Stock Exchange, including warnings to companies with inefficient capital use, contribute to the positive outlook.
Déjà Vu and Wage Hikes: The recent rally is compared to a “déjà vu” by Bank of America, drawing parallels with the Nikkei’s rise in 2023. One significant factor contributing to the rally is the expectation of higher Shunto wage hikes in 2024. The Shunto negotiations have seen major companies announcing substantial wage increases, potentially impacting market dynamics.
Break from Deflationary Cycle: Investor optimism stems from hopes that Japan will break free from its deflationary cycle and benefit from supply-chain diversification amid US-China tensions. The weak yen further attracts overseas investors, with net inflows into Japanese equity funds rising significantly.
Technical and Valuation Insights: Bank of America notes that while the valuation of Japanese markets is not yet stretched, it is not as cheap as in the previous rally. The technical front suggests that equities might not have substantial upside room in the short term. The median price-to-earnings ratio is currently at 14x, compared to the peak of 14.5x.
Short-Term Cautions: Analyst Yeap acknowledges near-term overbought technical conditions, suggesting a potential short-term breather for the index. Despite this caution, the prevailing upward trend is expected to persist, with the Nikkei 225 potentially retesting its 1990 high in the coming months.
The recent surge in Japan’s Nikkei 225 index signifies a remarkable comeback for the country’s equity market. While optimism prevails due to various economic factors and corporate governance measures, analysts exercise caution regarding potential short-term adjustments. The dynamics of the Japanese market, coupled with global economic conditions, will play a crucial role in determining the sustainability of this historic rally.
