The Japanese stock market has been one of the best performing global markets of the past few years. The Nikkei 225 crossed the 20,000 mark again for the first time in 15 years. The symbolic crossing reminds me of the day I was trading in New York and the Dow crossed 10,000 for the first time. The entire trading floor erupted in cheers as if our team had just won the SuperBowl.
For the Nikkei, the last cross of 20k coincided with tech bubble bursting here in the U.S. and subsequent global crisis; thereby crushing Japanese stocks over the next few years. I don’t expect the same fate this time around for several reasons.
First, Prime Minister Shinzo Abe has been on an ardent quest to break the deflationary hold on the Japanese economy. Ultra-aggressive monetary policy has depreciated the yen dramatically since his election in 2012. His bold stance and coordinated plan with the Bank of Japan has given investors a renewed confidence in Japan. His successes have been moderated of late with an animal he has less control over, i.e. influencing corporate culture. Abe has met resistance as he has encouraged Japanese companies to raise wages for employees. Wage inflation has been non-existent, but a shrinking workforce due to demographics will likely force wages higher in the future even without Abe’s support. With an aggressive leader and central bank at your back, it is reasonable to think Japan could continue to see improvement and the Nikkei could move higher from here.
Secondly, developed markets across the globe have appreciated significantly. Some countries are trading outside of their own historical ranges. J.P. Morgan produced a comparison chart for developed markets, and we see that Japan is still trading at a relative value to its peers. So while enthusiasm for Abe’s turnaround plan has been strong, Japanese equities do not seem unreasonably speculative at this time.
Mukherjee, Andy – BREAKINGVIEWS-Japan stocks can rise beyond symbolic Nikkei high – Thomson Reuters Eikon 4.23.15
JP Morgan – Guide to the Markets – 1st Quarter 2015