TOKYO - Buoyed by a wave of buying from overseas, including the stamp of approval from legendary investor Warren Buffett, Japan’s economic outlook is brightening, deflationary concerns are dissipating, and the stock market is on a climb that could take it above its all-time record highs. It only took 33 years.
On Dec. 30, 1989, Japan’s premier market index, the Nikkei 225, closed at 38,915.87, capping a year that saw a 29 percent rise and an amazing 15-year climb that helped to put Japan at the center of the global economic map. But in 1990, it fell 39 percent, marking what is now known as the end of the so-called bubble economy. The sharp fall that year was far from the end. Despite numerous attempted rallies over the years, the market was on a long and seemingly inexorable fall, hitting just 7,054.98 points in March 2009. Over 20 years, the market had fallen 82 percent.
The latest rally shows how far the market has come back, with valuations now up more than 370 percent from the 2009 nadir. And it may have a long way to go yet. While Tokyo, as of mid-June, remains 13 percent below its 1990 high-water mark, in the same time period the FTSE 100 in London has risen 213 percent, and the Dow Jones Industrial Average has soared 1,146 percent. No wonder investors are now seeing opportunity in Japan, since just catching up to the rest of the world would represent potentially large gains.
One of the main drivers in the market’s climb is a surge in inflation that started with the shortages and higher commodity prices of the COVID-19 pandemic. While the higher external costs have been a headache for all major economies, in Japan they quickly produced what a decade of monetary easing had failed to achieve: demand-driven inflation where wages and prices both rise. After nearly three decades of deflationary price pressures, Japan’s inflation rate has quickly climbed from near-zero levels to 4 percent. While that is still subdued by global standards, it is still the highest since September 1981. “A cycle between inflation and wages is finally emerging in Japan. I think this is a structural change in the economy,” said Kentaro Koyama, Japan chief economist for Deutsche Bank.
This is exactly what former Bank of Japan Gov. Haruhiko Kuroda vowed to create when he took office in 2013. He quickly undertook a bond and equity buying spree that left the central bank holding 50 percent of all the Japanese government bonds in circulation and becoming a major holder of stocks. The target he set was a consistent 2 percent inflation rate that would be seen in both prices and wages. After 10 years in office, making him the longest-serving Bank of Japan governor in history, but with little sign of numbers moving, his goal finally came into sight just as he stepped down earlier this year. ...continue reading
