Stocks at All-Time High: Use Occasion as Starting Point for Overcoming ‘Lost 30 Years’

The Nikkei Stock Average on the Tokyo Stock Exchange has reached an all-time high for the first time in about 34 years. This should serve as a starting point for new growth and breaking out of the long period of stagnation known as the “lost 30 years.”

On Thursday, the benchmark Nikkei Stock Average rose sharply, hitting 39,156 at one point. It surpassed the all-time session high of 38,957, recorded on Dec. 29, 1989, during the bubble period.

In addition, the closing price on Thursday reached 39,098, exceeding the previous record of 38,915.

Under the country’s prolonged deflation following the collapse of the bubble economy, the economy had been unable to break out of a vicious cycle in which stagnant wages and low consumption reinforced each other.

Stock prices also remained sluggish, and in 2009, the year after the collapse of U.S. investment bank Lehman Brothers, the Nikkei average closed at 7,054. With Thursday’s closing price, it has returned to a level more than five times that of 2009.

The recovery in stock prices, whose sluggishness had been a symbol of the Japanese economic slump, should lead to the revival of the economy.

Corporate earnings have been strong. The combined final profits of major companies listed on the TSE for the business year ending March 2024 are reportedly expected to hit all-time highs for the third consecutive year. Expectations for the companies are probably one of the reasons for the rise in stock prices.

Another factor reportedly is that foreign investors view Japanese stocks as undervalued. Trading by foreign investors accounts for about 60% of the total trading value of Japanese stocks.

Meanwhile, it cannot be said the current stock market rally is solely due to the earnings power of Japanese companies. The weak yen is boosting the earnings of exporting firms. Some have argued that the rise in stock prices is skewed toward semiconductor-related companies.

The U.S. economy is steady and U.S. stock prices continue to rise: This has had ripple effects on Japanese stocks. A prolonged real estate recession and other factors have caused Chinese stock prices to fall, and it is believed that funds are moving out of the Chinese market and into Japan.

In sharp contrast to the boom years of the bubble economy, many Japanese citizens are feeling little of the stock price recovery.

Domestic consumption in Japan has been sluggish because the pace of wage increases is not catching up with rising prices. In 2023, Japan’s nominal gross domestic product in dollar terms fell to fourth place in the world, overtaken by Germany.

Despite the fact it marked an all-time high, Japan’s stock prices are only back to the level where they were about 34 years ago. During that time, the U.S. Dow Jones Industrial Average has increased about 14-fold. In Japan, there are no profitable giants like Apple Inc. or Microsoft Corp. in the United States.

Japanese companies need to enhance their earnings power in earnest, by using the recovery in stock prices as an opportunity. To this end, aggressive domestic investment and efforts to raise wages will be indispensable.

(From The Yomiuri Shimbun, Feb. 23, 2024)