Stock Average Topping ¥30,000 does not Reflect Economic Realities

The Japanese economy has yet to make a full-fledged recovery. A rise in stock prices, which seems to be outpacing the actual situation, cannot be welcomed without reservations.

The benchmark Nikkei stock average on the Tokyo Stock Exchange has recovered to the ¥30,000 level at Monday’s close. This was the first time in about 30 years and 6 months, since August 1990 during the bubble economy.

Preliminary figures for the real gross domestic product for October-December 2020 showed better-than-expected annualized growth of 12.7% compared to the previous quarter, and this is perceived as indicating that the foundation of the Japanese economy is stable.

The rise may also be attributed to brisk earnings at major companies, including Toyota Motor Corp. and SoftBank Group Corp., and a spate of companies that have revised up their earnings forecasts.

A rise in stock prices is beneficial to the economy because it is said to have a “wealth effect” in which people who own stocks increase their spending, and it also makes it easier for companies to collect funds.

However, it is necessary to be careful about the current rapid rise in stock prices.

What is behind this is a surplus of money resulting from global monetary easing and fiscal stimulus. With low interest rates making it difficult to invest, investment funds are flowing into the stock market. Foreign investors account for about 70% of trading value on the Tokyo Stock Exchange.

There are persistent suggestions that the Bank of Japan’s massive purchases of exchange-traded funds (ETF) are hindering sound market formation.

Japan’s real GDP was down 4.8% for the year 2020, the first decline in 11 years since 2009 after the collapse of U.S. investment bank Lehman Brothers.

The government declared a state of emergency again in January due to the spread of the novel coronavirus and this has dealt a blow to service industries including the restaurant and leisure sectors. There is a view that there will be negative growth again in the January-March 2021 quarter.

The stock prices are based largely on expectations that the infection will be brought under control.

The fact that a vaccine from U.S. pharmaceutical giant Pfizer Inc. has been approved and will soon be available for vaccination has been a factor in stock purchases. The stock prices of air transport and railroad companies, which are suffering huge losses, are also strong.

Concerns cannot be dispelled that there is a bubble in the market that is out of sync with economic trends. Many nonregular workers, who are suffering from a sharp drop in their incomes, will not benefit from the rise, and the income gap could widen further.

The government and the Bank of Japan have no choice but to take steady steps to boost the economy to maintain stock prices, while keeping an eye on the overheating of the market. For the time being, they should do all they can to prevent the spread of infections and provide as much support as possible to businesses, especially those in the service sector.

In the medium to long term, it is important to encourage private investment in digitization and decarbonization to reduce greenhouse gas emissions and to raise the potential growth rate, which reflects the real economic strength.

— The original Japanese article appeared in The Yomiuri Shimbun on Feb. 17, 2021.