On Feb. 22, the Nikkei Stock Average soared to a historical peak, reaching 38,915.87 points, a milestone unseen since December 1989. This achievement represents a significant shift from Japan’s long-standing economic challenges, highlighting a momentous pivot toward growth. Seiji Nakata, president of Daiwa Securities Group, remarked, “This breakthrough is more than a symbol; it’s a profound change, underscoring the beginning of a new era for Japan’s economy.”
As 2024 commenced, the Nikkei Index witnessed a remarkable ascent, escalating by nearly 5,000 points in just over a month. This bullish trend in Japan’s stock market is attributed significantly to the influx of Chinese investors, marking a pivotal factor behind the surge.
Analysts and market observers highlight that foreign investment, notably from China, is driven by optimism toward Japan’s economic trajectory. After years of battling deflation post-bubble economy, Japan is now embracing healthy inflation, creating an attractive landscape for investors.
The positive sentiment toward Japan’s stock market is also fueled by geopolitical dynamics, particularly the global stance against the Chinese Communist Party (CCP) amid growing U.S.-China tensions. Japan’s strategic alliance with the United States in Asia positions it as a key player poised for economic advancement.
Unprecedented Force Behind Japan’s Stock Market Boom: Disenchanted Chinese Investors
The significant uptick in Japan’s stock market is widely attributed to the influx of “optimistic foreign investors.” Traditionally, this group is thought to comprise European and American pension funds or hedge funds. However, the current narrative has shifted, spotlighting an unexpected demographic. Japanese reports are abuzz with accounts of Chinese investors, disenchanted by their domestic market’s downturn, flocking to Japan’s stock market in record numbers.As we stepped into 2024, China’s economy remained mired in recession, with its stock market on a persistent decline. On Feb. 2, the Chinese A-shares suffered yet another blow, tumbling below the 2,700-point mark for the first time since April 2020. Similarly, the Shenzhen Composite Index fell below 8,000 points. This widespread decline across the Shanghai, Shenzhen, and Tokyo markets signaled a stark downturn.
Faced with limited outlets for their frustration, Chinese investors took to the Weibo comment sections of foreign institutions, including the U.S. Embassy in China, to voice their grievances against the CCP. A particularly resonant comment lamented the personal toll of unemployment and debt, garnering widespread support.
Amidst this backdrop, rumors of Chinese leader Xi Jinping’s ill health circulated online on Jan. 24, fueling satire among netizens. Critics humorously suggested that only adverse news concerning Mr. Xi could uplift the Chinese stock market, indicting his economic policies.
In a strategic pivot, Chinese investors channeled their capital into Japanese stocks via onshore exchange-traded funds (ETFs). Notably, on Jan. 10, the trading volume of the China AMC Nomura Nikkei 225 ETF soared to a record-breaking 373 million yuan (about $51.84 million), dwarfing the average trading volume of the previous year by a factor of ten.
These investors have openly criticized the CCP’s heavy-handed intervention in the stock market to Japanese media, lamenting the stifling effect on market dynamics and praising the Japanese market’s relative stability and policy transparency.
Sunsuke Kondo, a seasoned economic commentator and former fund manager at Nomura Investment Trust, characterized this wave of investment as driven by “angry Chinese investors.” He noted that this trend, which began in the latter half of last year, signifies a profound shift, underscoring the global reach of domestic discontent within China and its unexpected repercussions on international financial markets.
Bank of Japan Governor Confirms Economic Revival as Deflationary Era Ends
In a transformative shift, Japan’s stock market has finally broken free from the pessimistic belief entrenched during the “lost 30 years” that “stocks do not rise.” This change in mindset follows the Nikkei Index’s breakthrough above a three-decade-long “ceiling,” signaling a pivotal moment in Japan’s economic resurgence.Ryoji Musya, President of Musha Research Co., Ltd., and a renowned investment strategist, shared his optimism with Nikkei CNBC, stating, “The recent surpassing of the bubble economy peak by the Nikkei is just the beginning. We foresee the index potentially reaching 45,000 points within the year.”
Mr. Musya outlines three principal factors fueling this positive outlook: First, the robust internal dynamics of the Japanese economy, highlighted by overcoming deflation, the undervaluation of Japanese stocks offering high buying potential, and the successful implementation of reforms aimed at transforming Japanese companies into more profit-oriented entities.
Second, geopolitical and security considerations, particularly the escalating U.S.-China tensions, position Japan as a principal beneficiary and a burgeoning hub for high-tech industries due to its alliance with the United States.
Third, the new industrial revolution propelled global economic growth, with the U.S. retaining its dominant stance. Japan’s cooperation with the United States., both in security and economic spheres, is likened to the economic boom experienced during the Korean War, promising substantial growth for Japan.
Conversely, the Nikkei Index’s leap is partly attributed to the influx of foreign investments, including significant Chinese participation. This raises discussions on whether such short-term foreign capital inflows truly signify Japan’s full recovery from the post-bubble economic stagnation.
Takashi Hiroki, chief strategist at Monex Securities, lists seven key drivers behind the stock market’s rise: the transition from deflation to inflation; the alignment of Japanese corporate governance with global standards; the international investment community’s positive reception; capital shifts from China to Japan; record highs in U.S. stocks; the Bank of Japan’s continued monetary easing fostering a weak yen favorable for stocks; and robust corporate earnings.
During an interview, Mr. Hiroki elaborated, “The long-standing deflation that followed the bubble’s burst has weighed down Japan’s economy for over three decades. Now, as we pivot from deflation to inflation, deflation is becoming obsolete, and improving corporate earnings presents an attractive investment landscape. This fundamental shift is why foreign capital is increasingly bullish on Japan.”
Mr. Hiroki anticipates that the Japanese economy is on the cusp of normalizing growth, with the stock market expected to surpass 40,000 points, aiming for 43,000 points.
Addressing inquiries on whether Japan has conclusively left its deflationary struggles behind, Kazuo Ueda, governor of the Bank of Japan, provided a definitive perspective at a House of Representatives Budget Committee meeting on Feb. 22.
He forecasted a continuation of the inflationary trend established in 2023 and clarified, “The current state of the Japanese economy is one of inflation, not deflation.” Mr. Ueda underscored the emergence of a virtuous cycle of wage and price increases, indicating the maturing conditions for an eventual departure from negative interest rate policies.
