What has changed in Japan’s economy to spark a rally in stocks?
Shares in Japan look cheap because of the weak yen, which has been a boon for exporters who take their profits overseas. Major changes in the corporate sector have also given shareholders more rights, allowing them to push for changes that favor their shares.
And unlike other parts of the world, rising inflation in Japan recently has been seen as a sign that things are going in the right direction, after decades of falling prices and sluggish economic growth have discouraged people and companies from spending.
Japanese stocks also benefited from the slowdown 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 recently traded at lows not seen since the 2015 crash.
Foreign investors play an important role in the rise of the market.
Overseas investors have been enthusiastic buyers of Japanese stocks, pumping a net $14 billion into the market in January, according to Japan Exchange Group data, a sharp turnaround from the roughly $3 billion they pulled in December.
Corporate earnings are strong, another reason investors are pouring money into Japan. Profits at major Japanese companies are expected to rise more than 40% in their latest quarterly results, according to Goldman Sachs. Bigger companies such as Toyota and SoftBank have also reported some of the biggest earnings surprises, the bank’s analysts noted. Toyota recently climbed to a record market value for a Japanese company of about $330 billion, surpassing the mark set in 1987 by telecommunications group NTT.
“Skeptics continue to argue that Japan never changes and foreigners are always disappointed, so get out now,” Goldman analysts wrote. However, they said the recent rally in stocks appears less exaggerated than during previous rallies that have faded.
According to a survey of fund managers conducted by Bank of America, buying Japanese stocks is the third most popular trade this year, but remains a long way behind the top two: betting against China’s stock market and buying the group of tech giants such as Apple and Microsoft, known as the ‘Magnificent Seven’.
What will the Bank of Japan do next?
Economic growth in Japan remains on shaky ground. Figures released last week showed the country’s economy unexpectedly shrank in the fourth quarter, compared with 3.1 percent growth for the United States.
While much of the world has raised interest rates to fight inflation, Japan has kept them low in an effort to stimulate it, preferring to intervene in markets to prevent its currency from weakening too quickly or rising too sharply in government bond yields. bonds.
As growth is just starting to pick up, the central bank is trying to gauge when it would be appropriate to start raising interest rates – supporting its currency – without completely neutralizing inflation.
Complicating matters are the economic effects of the earthquake that struck the Southern Peninsula, on the country’s western coastline, in January. Japan’s economy is also vulnerable if much of the rest of the world begins to slow down.
For now, economists expect the central bank to raise interest rates out of negative territory but keep them at zero for the rest of the year.
