Why Japan is experiencing the biggest stock market boom in over 30 years – 06/19/2023 – Market

For the first time in over 30 years, the Japanese stock market is experiencing an unexpected boom.

The country’s main stock index, the Nikkei 225, has not registered such an expressive rise since the early 1990s, when Japan’s economy was still experiencing its “miracle” — and before the beginning of the so-called “Lost Decade”.

So far this year alone, the index has risen by nearly 30%, largely thanks to international investors betting on shares of Japanese companies.

This optimism is explained, in part, by the changes that the Tokyo Stock Exchange is promoting.

In March, the stock market unveiled a reform plan for companies to pay more dividends to their shareholders or buy back shares in their own company — which usually causes a company’s share price to rise.

This reform in the Japanese stock market is seen by some analysts as a way of putting pressure on company managers to increase profitability and efficiency in the use of capital.

In a country where many corporate directors do not see shareholders as their allies, the reforms could have a ripple effect as large companies begin to implement them.

Influenced by the change in the operating rules of the Tokyo Stock Exchange, among other factors, the value of shares in giants such as Mitsubishi and Honda rose by around 50% this year.

Japanese stock exchange heads have warned that companies that do not conform to the new rules could be off the exchange in 2026.

All of this is happening in an economy that is considered solid, with a weak currency and very low interest rates — just when many of the world’s largest economies have historically high interest rates.

But there is another key factor to explain the Japanese stock market boom: billionaire Warren Buffett’s enthusiasm for companies in Asian countries, an example for many foreign investors who follow in his footsteps and trust his investment criteria.

The Warren Buffet Effect

The legendary tycoon revealed in May that he bought even more shares in five Japanese companies: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo.

He also said he may consider more such investments in the future. This announcement contributed to a strong buying spree by foreign investors in Japan’s stock market in the following weeks.

Buffett, chairman and chief executive of Berkshire Hathaway, has long had his eye on Japan. Its commitment to this market has nearly tripled in value in less than three years.

And with his latest moves, the value of the five Japanese companies he invested in rose by an average of 180%.

During Berkshire’s annual meeting in May, the billionaire justified his decision by arguing that the five Japanese companies were “ridiculously” cheap, well established, focused on the long term and big enough to generate good returns.

exaggerated optimism

The Japanese government has also been pressuring the country’s publicly traded companies to return more money to investors, increasing their attractiveness to foreign funds.

However, some analysts warned that investors are too optimistic about a change in Japanese business attitudes.

Economists at Bank of America (BofA) have warned that the euphoria over buying shares in Japanese companies is “premature”.

In his opinion, it is too early to bet on Japan, with its economy in a completely opposite position to that of its international peers, with its central bank keeping intact its stimulus strategy, which includes negative interest rates.

That doesn’t mean they don’t see potential for the future. Specifically, BofA believes it could be a “potential 2024 operation”.

For now, corporate earnings are improving and Japan’s economy, which is the third largest in the world, is having a good time after the pandemic.

In a country with a history of deflation, it’s good news that inflation is back. Consumer spending is on the rise (as are projected wage increases) and foreign tourists are back.

Thus, growth expectations are better for the Japanese economy than for other developed countries.

Gross Domestic Product growth estimates for this year have risen to 2.7%, while other countries such as the US and the European Union may face a possible recession.

Amid international difficulties, Japan is in a better position than the rest of the major economies.

But one of the questions that remains in the air is how long this positive economic moment will last and whether the reforms implemented in the stock market will have an expansive effect on the rest of the economy.