Japan’s Nikkei rises after 34 years, but is history?repeating?

After more than three decades, Japan's Nikkei 225 stock index has achieved a remarkable feat, surpassing its thirty four year record high set during the country's 1989 asset bubble. On February 22nd, 2024, the index closed above 39,098.68 points for the first time ever, marking a 17% gain year-to-date and an impressive 81% increase over the past five years.

The previous record closing high of 38,915.87 was set on December 29, 1989, the last day of trading.?

The Nikkei 225's success can be attributed to various factors, including strong corporate profits and a weak yen, which make Japanese exports cheaper and more appealing to foreign buyers. In fact, the Nikkei 225 has risen over 17% year-to-date and 42% in the last year, indicating strong market sentiment. This is also reflected in the broad-based optimism among investors, with 190 of the index's 225 constituents advancing while only 34 declined.

But Japan has a long journey in the stock market. Let us examine the history of Japan's economic evolution over the past few decades.

1868-1868:

Stock exchanges existed in Japan as early as the 17th century, primarily focused on rice and commodities trading. These exchanges were localized and lacked formal structures.

It marked a significant turning point when the Tokyo Stock Exchange was established in 1878. During this period, the government actively promoted industrial development, leading to the listing of companies involved in various sectors like textiles, shipbuilding, and mining.

1945-1980s:

After the devastation of World War II, Japan focused on an ambitious reconstruction effort. The government implemented policies to encourage economic growth, leading to a surge in corporate profits and stock prices. The Nikkei 225 index, launched in 1950, became a prominent benchmark for the Japanese stock market.

The country's GDP grew at an average rate of 9% per year between 1955 and 1973, earning it the nickname Japan Inc. This period of rapid growth was fueled by a combination of government policies, including heavy investment in infrastructure, education, and research and development.

The 1989 era:

Japan's economic growth slowed in the 1980s due to a combination of factors, including over-investment in the asset market, inefficient corporate governance, and an aging population.

‘The 1989 effects led to banks wrote off some 100 trillion yen in bad debts.’

In 1989, Japan's booming economy fueled a massive asset price bubble. The Nikkei 225 stock index skyrocketed, reaching a record high of 38,915. This surge was driven by low interest rates, government spending, and speculation. However, the bubble soon burst in 1990 due to? rising interest rates, concerns about overvaluation, and shifting investor sentiment, which triggered a dramatic decline leading to a sharp collapse.

The Nikkei plummeted by over 63% by 1992, triggering a period of economic stagnation known as the Lost Decade. The crash impacted businesses, individuals, and the entire Japanese economy for years.

?2000s-2020s

In the 2000s, Japan's economy started to show signs of recovery. The Bank of Japan implemented quantitative easing measures in the early 2000s to stimulate the economy.

The Global Financial Crisis of 2008 had a significant impact on Japan's economy, causing a sharp contraction in growth. The government implemented a series of policies aimed at stimulating growth, including monetary policy reforms and increased investment in research and development. The government also undertook various reforms to improve corporate governance and attract foreign investment. The Nikkei ultimately recovered, surpassing the 20,000 mark in 2013 and reaching new highs in subsequent years.

The Nikkei 225's Record-Breaking Performance

As mentioned earlier, the Nikkei 225 index has reached a new all-time high. This record is particularly noteworthy given the challenges faced by the Japanese economy in the decades following the financial bubble burst.

However, concerns remain:

The recession and ongoing geopolitical tensions create uncertainty for the future of Japan's economy. The Bank of Japan's monetary policy, including negative interest rates, faces scrutiny as the central bank navigates these challenges.

Additionally, the Nikkei's ascent inevitably invites comparisons to the 1989 bubble, which ultimately burst, leading to a devastating economic crisis. While the fundamentals seem different this time, the possibility of another bubble cannot be entirely dismissed.

The Japanese economy's recession in the last three months of 2023 was unexpected, with the country's gross domestic product (GDP) contracting by a worse-than-expected 0.4% in the last three months of 2023, compared to a year earlier. This has led to Japan losing its position as the world's third-largest economy to Germany.