The Year of the Dragon got off to a dramatic start for Japan with the magnitude 7.6 Noto earthquake on Jan. 1 and a fiery plane collision on Jan. 2 at Haneda Airport. Despite these adversities, the Japanese stock market has demonstrated remarkable resilience, starting the year on a strong note.
On Jan. 12, the Nikkei Stock Average reached an impressive 35,577 yen, marking a historic peak not seen since the aftermath of its economic bubble.
The surge has ignited investor optimism, with many anticipating a “soaring dragon” trend in the stock market for the dragon year.
In the Japanese financial lexicon, the phrase “Tatsumi ceiling” is often used, where “Tatsumi” symbolizes the dragon and snake years and “ceiling” denotes high prices in the market. This dragon year, investors seem confident that stock prices will emulate the rising dragon, heralding a period of prosperity that will extend into 2025’s year of the snake.
Tokyo Stock Exchange Regains its Stature as Asia’s Largest
A pivotal moment occurred on Jan. 11 when the total value of stocks on the Tokyo Stock Exchange, calculated in U.S. dollars, surpassed the Shanghai Stock Exchange. This achievement reclaimed Tokyo’s title as the largest stock exchange in Asia, a position it had not held for more than three years.Two key factors contributed to this shift: the repatriation of Japanese investments from China and a strategic move by some investors who, seeking to mitigate risks, shifted their focus from the Chinese to the Japanese market.
On Jan. 11, the Tokyo Stock Exchange’s market value soared to 917 trillion yen (about $6.32 trillion), breaking historical records and registering a significant increase of 13 trillion yen (about $94.9 billion) from the previous trading day.
Historically, in July 2020, the Tokyo Stock Exchange was overtaken by the Shanghai Stock Exchange. However, a reversal began to manifest in the third quarter of 2022. While the Tokyo exchange experienced a steady rise, the Shanghai exchange faced a decline. By Jan. 10 it had reached its lowest value since May 2020.
The decline in the Shanghai exchange can be attributed to two major factors: first, the Chinese government’s unexpected announcement of stricter regulations for online games, which sparked investor concerns over the business environment in China and led to a steep drop in gaming stocks. Second, the continued downturn in the real estate sector prompted investors to reduce their investments or withdraw entirely to avoid risks.
Amidst these shifts in China’s business landscape, foreign investors began reevaluating their asset allocations in China. August witnessed a record net sell-off, with the trend of net selling persisting into January 2024.
Tetsuhiro Nishi, Executive Director of Japan’s Nomura Securities, opines that the ongoing uncertainties in the Chinese market are driving capital towards the Japanese stock market. This trend, he believes, is likely to continue.
Additionally, Chinese investors, seeking to diversify and hedge risks, have increasingly turned their attention to the Japanese stock market. For instance, on Jan. 11, the trading volume of the Huaxia Nomura Nikkei 225 ETF in Shanghai saw an extraordinary surge, exceeding ten times the average daily trading volume of the previous year.
A historical perspective reveals that in 2007, the collective market value of China’s three major exchanges (Shanghai, Shenzhen, Hong Kong) exceeded that of Japan for the first time. By 2010, China’s Gross Domestic Product (GDP) had surpassed Japan’s, securing its position as the world’s second-largest economy.
China’s entry into the World Trade Organization in 2001 catalyzed a significant influx of foreign investment, buoyed by the country’s vast market and promising economic growth prospects. This led to a surge in investments in Chinese financial markets, such as the Shanghai stock market, and a corresponding decrease in Japanese stock holdings.
However, the stringent measures adopted by China during the pandemic, including its zero-COVID policy, not only stifled economic development but also exposed long-standing systemic issues.
Extreme social management strategies, a perceived regression towards Cultural Revolution-era tactics, and the introduction of anti-espionage laws have precipitated a mass exodus of foreign companies and capital withdrawal.
Anticipating a ‘Rabbit Jump’ and a ‘Dragon Rise’ in the Japanese Stock Market
In the lexicon of the Japanese stock market, terms like “rabbit jump” and “dragon rise” are not just fanciful expressions but indicators of market trends. The year of the rabbit, 2023, saw the Japanese stock index leap by 28 percent. Now, in the year of the dragon, there is palpable anticipation of a “dragon rise.” Investors are eyeing the Nikkei 225’s historic high of 38,915 yen, set in December 1989, with ambitions to breach the 40,000-yen mark.Historical data since 1950 show that the Nikkei Average typically rises by 11 percent. However, during dragon years, the average increase is a striking 27.9 percent, significantly outpacing other zodiac years.
A notable instance occurred 12 years ago during the late Shinzo Abe’s second term as prime minister. His “Abenomics” policies spurred economic growth and buoyed the stock market. Similarly, the IT boom in 2000 propelled stock prices upwards. The record high of 38,915 yen in 1989, a snake year, was largely a continuation of the momentum generated in the preceding dragon year, according to a Jan. 11 article in the Japanese daily Sankei Shimbun.
Following the bursting of its bubble economy in 1991, Japan grappled with a protracted period of recession or low growth, often termed the “lost 30 years” by economists. Japanese economist Masahiko Aoki postulated that transitioning to a new economic system might take about 30 years.
Entrepreneur and investment expert Ken Shibusawa presents a “30-year cycle” theory, drawing from modern Japanese history. He suggests that economic changes are cyclical: a 60-year full cycle comprises 30 years of decline followed by 30 years of growth, aligning with the Yin and Yang principles. Mr. Shibusawa posits that Japan is now entering a 30-year phase of prosperity.
This optimism is echoed by some Japanese financial experts who believe the Nikkei Average could surpass 40,000 yen, based on the current economic momentum.
A recent survey conducted on Jan. 12 by Jiji Press asked five market experts for their projections. Three of the experts anticipated the average stock price to stabilize around 30,000 yen, with peaks and troughs ranging from 36,000 to 38,000 yen. The remaining two experts were more bullish, predicting the index could exceed 40,000 yen, with one forecasting a rise to 41,800 yen by year-end.
Their confidence stems from various factors: the robust foundation of the Japanese economy, advancements in semiconductor-related Japanese companies, a shift in investment strategies following U.S. interest rate cuts, and an uptick in domestic and international investments in Japan.
However, some analysts caution that the Japanese stock market’s steady rise since the year’s start may indicate overheating. External factors, such as slowing economic growth in China and the United States or a rapid appreciation of the yen, could dampen the upward trajectory. Additionally, the perception of undervalued Japanese stocks has diminished, possibly capping further significant appreciation.
The Year of the Dragon is also traditionally viewed as a period of political instability. Upcoming political shifts in Japan, alongside presidential and parliamentary elections globally, especially the U.S. presidential election, are poised to impact the stock market’s direction significantly.
Japan’s deep historical ties with Chinese culture, including prolonged use of the Chinese lunisolar calendar, persisted into modern times. In 1873, Japan aligned itself with the Western Gregorian calendar. Thus, in Japan, the year of the dragon, or “year of Jia Chen,” commenced on Jan. 1, 2024, diverging from the traditional Chinese start date, which is aligned with the new moon and will be on Feb. 10 this year.
However, Japan and China continue to share a deep cultural understanding. The dragon, or “tatsu” (辰) in Japanese, symbolizes rising, appearance, or ascension. The Japanese perceive the Year of the Dragon as a time for striving, upward movement, and vigorous effort.
