Japan’s Nikkei Hits Record High, Surpassing 1989 Peak

What has changed in Japan’s economy to spark the stock surge?

Stocks in Japan have looked cheap because of a weak yen, which has been a boon to exporters that make their profits overseas. Important changes to the corporate sector have also given shareholders more rights, allowing them to push for changes that favor their stock holdings.

And in a contrast with other parts of the world, rising inflation in Japan recently has been seen as a sign that things are headed in the right direction, after decades of falling prices and sluggish economic growth discouraged people and companies from spending.

Japan’s stocks have also benefited from a downturn in China, where economic growth has slowed under the weight of a plunge in real estate and a host of systemic and political challenges. Chinese markets have recently traded at low points that haven’t been reached since a rout in 2015.

Foreign investors are playing an important role in the market’s rise.

Investors from abroad have been enthusiastic buyers of Japanese stocks, pumping a net $14 billion into the market in January, according to data from Japan Exchange Group, a stark shift from the roughly $3 billion that they pulled out in December.

Corporate profits are strong, another reason investors are pouring money into Japan. Earnings at large Japanese companies are set to rise by more than 40 percent in their latest quarterly results, according to Goldman Sachs. The biggest companies, like Toyota and SoftBank, have also reported some of the biggest earnings surprises, the bank’s analysts noted. Toyota recently rose to a record market value for a Japanese company, about $330 billion, surpassing the mark set in 1987 by the telecom conglomerate NTT.

“The skeptics continue to argue that Japan never changes, and foreigners always get disappointed, so get out now,” the Goldman analysts wrote. But they said that the recent run-up in stocks looks less overblown than during past rallies that fizzled out.

According to a survey of fund managers conducted by Bank of America, buying Japanese stocks is the third most popular trade this year, but it remains far short of the first two: betting against China’s stock market and buying up the group of behemoth tech stocks, like Apple and Microsoft, known as the “Magnificent Seven.”

What will the Bank of Japan do next?

Economic growth in Japan remains on shaky ground. Numbers released last week showed that the nation’s economy unexpectedly shrank in the fourth quarter, compared with an increase of 3.1 percent for the United States.

While much of the world has raised interest rates to combat inflation, Japan has kept them low in an attempt to stoke it, preferring to intervene in markets to prevent its currency from weakening too quickly, or government bond yields rising too sharply.

With growth just starting to recover, the central bank is trying to gauge when it would be appropriate to start raising interest rates — supporting its currency — without stamping out inflation altogether.

Complicating matters is the economic impact of the earthquake that hit the Noto Peninsula, on the western shoreline of the country, in January. Japan’s economy is also vulnerable should much of the rest of the world start to slow down.

For the time being, economists forecast that the central bank will raise interest rates out of negative territory, but hold them at zero for the rest of the year.