The Nikkei 225 passed 30,000 on Monday, the first time in over three decades that Japan’s blue-chip stock market index crossed that threshold. The long-awaited event was spurred by a series of positive news reports, and most analysts believe that more gains are in the offing.
But we should not kid ourselves: The market rebound is bound to fade as structural issues reassert themselves. A strong stock market is good for Japan, but more important is the health of the overall economy. That remains in doubt.
The Nikkei has had a good run. It has risen nearly 30% since November, almost 9% since the beginning of the year and climbed more than 1,800 points, or close to 7% in the last two weeks. It is outperforming other markets in North America and Europe: The U.S.-based Dow Jones Industrial Average has registered only one-third of the Nikkei’s rise. Nor is the Nikkei alone: The Topix, which reflects a broader set of companies in Japan, also recorded a three-decade high this week.
Several factors helped propel the Nikkei to these heights. The first is the spate of good news in Japan and abroad that has built confidence. The Ministry of Health last weekend approved a coronavirus vaccine, opening the door to a national COVID-19 vaccination campaign.
That effort and progress being made around the world have spurred hopes that the pandemic will recede and normal economic activity can resume. Overseas, the Biden administration in the United States appears ready to push forward with its economic relief plan, which will also contribute to a global recovery.
Japanese companies are well positioned to exploit that turnaround. Many of the companies in the Nikkei create products that are needed in the early stages of a global recovery, like electronic parts manufacturers. The expected turnaround and the return of consumers to the market drives demand for their goods — along with the interest of investors.
Optimism is not misplaced. Japanese companies have reported strong earnings, which has fueled a search for undervalued stocks throughout the market. A weaker than expected yen-dollar exchange rate helps too, as it boosts the value of overseas holdings and sales.
Positive economic data also supports the market’s buoyancy. The Japanese government reckons that the economy had a strong performance in the last three months of 2020, marking two consecutive quarters of growth. The preliminary Cabinet Office report — which is always subject to revision, sometimes substantially — showed 3% growth from October to December, a better than expected performance.
That would yield 12.7% growth on an annual basis — but is in actuality a rebound from devastation created by the pandemic. For the 12 months of 2020, Japanese GDP fell 4.8%, the first decline since the 2008-2009 global financial crisis. After the strong performance of the last quarter, it is estimated that Japan has recovered about 90% of the losses that occurred in April-June 2020, when the coronavirus slammed the economy, and Japan recorded its worst economic performance in history, losing 45 trillion yen.
A final contributing factor is the easy money policy of central banks. Their readiness to provide liquidity has played a significant role in market advances around the world as some of those funds find their way into markets. While those policies are wise, central bankers are keeping an eye on inflation risks and tightening is inevitable. Its impact on markets is not to be ignored.
That possibility prompts feelings of deja vu — and foreboding — in Japan. The last time the Nikkei scaled these airy heights, the country was in the throes of the bubble economy, and the Bank of Japan’s (BOJ) determined efforts to throttle that speculative fever resulted in a lost decade and the economy has stumbled ever since.
That heavy hand is unlikely to return. Haruhiko Kuroda, governor of the BOJ, conceded this week that his goal of 2% inflation is beyond reach, and will likely remain so even in 2023, when his term ends. Having pledged to hit that target when he took office in 2013, that is a bitter confession.
The persistent failure to spur inflationary pressures underscores the need to look beyond the Nikkei to understand Japan’s economy. The recovery — which will likely falter in the first quarter of 2021 as the state of emergency takes its toll — is at most a return to the status quo ante. Growth prospects remain stunted. The Nikkei’s strong performance of the last year cannot mask its underperformance against other markets over the last three decades.
Japan’s economy continues to rely on old economy companies and productivity remains stunted. One hope was that tourism would provide a new source of dynamism and that looked like a good bet as the number of visitors soared, outpacing forecasts. The COVID-19 outbreak has exposed the risks of that strategy.
Women remain undervalued in the economy, a weakness that grows more significant as the population continues to shrink. Inequality is growing, and fears that the pandemic will produce a “K-shaped recovery” — one path for the wealthy and another for the less fortunate — are intensifying.
Experts expect profit taking to cap the Nikkei in a few weeks at just under 32,000, considerably less than its all-time high of 38,957.44, recorded in December 1989. The focus will return to the picture of Japan’s overall economy and the work that remains to be done to ensure that it best serves all its citizens.
The Japan Times Editorial Board
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