Japan’s Nikkei stock index has been making headlines with record-breaking surges attributed to strong earnings and investor-friendly measures. However, the sustainability of this rally is a subject of debate given Japan’s challenged economy.
The Nikkei 225 soared past the 40,000 mark, with economists speculating it still has room to grow, having surpassed its 1989 record high last month.
“I would not be surprised if Nikkei hit 50,000 in a matter of a few years. Sector-wise, high-tech related companies will continue to be promising,” remarked Kazuo Momma, Executive Economist at Mizuho Research Institute.
Japan’s corporate governance reforms have propelled the country’s stock markets, although it’s important to note that stock indexes don’t fully represent the entire economy, which includes SMEs and households.
While SMEs play a crucial role in Japan’s economy, accounting for 70% of national employment and 50% of economic growth, the sustainability of the current trend remains uncertain, as noted by Sayuri Shirai, former Bank of Japan board member.
The rally in Japanese stocks seems disconnected from the country’s economic struggles, notably dipping into a technical recession recently and losing its status as the world’s third-largest economy to Germany.
“Weaker yen, as well as investors looking to pare their exposure to China have also fueled the rally in Japan stocks,” remarked Sayuri Shirai, professor at Keio University.
However, concerns over the sustainability of this rally persist. While Japan Inc’s solid third-quarter earnings prompted optimistic forecasts, there’s skepticism regarding the continuation of this trend. Momma anticipates possible corrections in the Nikkei’s trajectory in the coming weeks or months.
Moreover, the Nikkei’s recent ascent doesn’t necessarily mirror Japan’s economic state. Phillip Colmar, Global Strategist and Managing Partner at MRB Partners highlighted the Nikkei’s flawed methodology as a stock market gauge, emphasizing its volatility compared to the underlying economy.
While Japan’s stock market rally has been impressive, caution remains warranted, with uncertainties regarding economic fundamentals and external factors that could influence market dynamics moving forward.
