By The Nikkei 225 index, representing Japan’s top 225 companies, has surged to levels unseen since 1989.
Impressive Rally
On Thursday, the Nikkei 225 JP:NIK soared by 2.2%, closing at 39,098.68. This surpasses the previous peak of 38,916 from December 1989.
Market Insights
According to Morgan Stanley analysts led by Jonathan Garner, the recent rapid rise in the index is not just a temporary spike. They emphasize that the profit from Prime Section-based companies has increased by 20% year-over-year, showcasing solid performance.
Japan’s Unique Success
Earnings per share estimates for Japan are on the rise for both this year and the next, which sets Japan apart as the only country with such positive growth projections. This growth is even more remarkable as it lacks a clear catalyst like artificial intelligence seen in other successful companies.
Berkshire Hathaway Influence
Interestingly, several companies in Berkshire Hathaway’s portfolio, such as Mitsubishi, Mitsui, Marubeni, and Sumitomo, have not contributed positively to Japanese profit margins despite being key investments for Warren Buffett’s company.
Overall, the Nikkei 225’s current standing is a testament to Japan’s thriving market and unique trajectory in the global economy.
Japan’s Corporate Governance Reforms
Japan’s efforts to push companies to adopt corporate governance reforms have resulted in record-high stock buybacks. Additionally, the country’s central bank is contemplating exiting its negative interest-rate regime as signs indicate a potential escape from deflation.
Unique Nikkei Index Anomalies
Analysts have observed that the Nikkei, similar to the Dow Jones Industrial Average, is a price-weighted equity index that sometimes produces peculiar outcomes. For instance, the largest weight in the index belongs to Fast Retailing (9983), which is the seventh-largest company by market cap. In contrast, the biggest company, Toyota Motor (TM), holds the fifteenth spot in the Nikkei by weight.
Topix Index Still Below Peak
The more traditionally structured Topix index (JP:180460) remains approximately 8% below its peak level. Over the past 52 weeks, U.S.-based investors may have fared better by staying domestic, with the S&P 500 (SPX) experiencing a 24% increase compared to the iShares MSCI Japan ETF (EWJ) with a commendable 20% rise.
Potential Risks Ahead
Japanese companies, having adapted to a sluggish domestic economy, face significant exposure to both the U.S. and China. While the U.S. is currently not a concern, China’s struggle with a Japan-like debt burden poses a risk. Additionally, fluctuations in the yen (USDJPY) could occur if the Bank of Japan decides to raise interest rates, potentially dampening Japan’s export competitiveness.
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