What changes in Japan's economy caused the stock market to rise?
The weak yen has made Japanese stocks look cheap, providing a tailwind for exporters who make money overseas. Significant changes to the corporate sector have given shareholders more rights and enabled them to drive changes favorable to their shareholdings.
And in contrast to other parts of the world, Japan's recent rise in inflation has brought things into sharp relief after decades of falling prices and slowing economic growth have constrained spending by people and businesses. It is seen as a sign that we are heading in the right direction.
Japanese stocks are also benefiting from China's slumping economy, where economic growth has slowed under the weight of plummeting real estate prices and a host of institutional and political challenges. Chinese markets have recently been trading at lows not reached since the 2015 crash.
Foreign investors play an important role in the market's rise.
Overseas investors have become avid buyers of Japanese stocks, with a net $14 billion flowing into the market in January, according to Japan Exchange Group data. That's a big change from the roughly $3 billion they pulled out in December.
Strong corporate earnings are another reason why investors are pouring money into Japan. Profits at Japan's largest companies are expected to rise more than 40% in their latest quarterly results, according to Goldman Sachs. Analysts at the bank noted that major companies such as Toyota and SoftBank have also reported unexpectedly large financial results. Toyota's market capitalization recently reached about $330 billion, a record for a Japanese company, surpassing the mark set by telecommunications conglomerate NTT in 1987.
“Skeptics keep insisting that Japan will never change and that foreigners will always be disappointed, so get out now,” Goldman analysts wrote. But they said recent stock gains don't seem as exaggerated as past bull runs fizzled out.
Buying Japanese stocks has become the third most popular trade this year, according to a survey of fund managers conducted by Bank of America, but it remains behind the first two: bets on the Chinese stock market and big tech. This is far from buying up stocks. Like Apple and Microsoft, known as the “Magnificent Seven.”
What will the Bank of Japan do next?
Japan's economic growth remains unstable. Figures released last week showed the U.S. economy unexpectedly contracted in the fourth quarter, while the U.S. grew 3.1%.
While many countries around the world have raised interest rates to combat inflation, Japan has kept interest rates low to stimulate inflation, causing the currency to depreciate too quickly and government bond yields to rise sharply. We chose market intervention to prevent this.
With growth beginning to recover, central banks are trying to figure out when is the right time to start raising interest rates to support the currency without completely curbing inflation.
Complicating matters is the economic impact of the earthquake that struck the Noto Peninsula on Japan's west coast in January. If much of the rest of the world begins to slow down, Japan's economy will also be vulnerable.
Economists expect the central bank to raise interest rates from negative territory for now, but keep them at zero for the rest of the year.
