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After a tough start to the year, Japan's Nikkei stock average has risen to within reach of its “bubble” high of 38,915 points set on December 29, 1989, which once seemed out of reach. did.
At one point on Wednesday, the gap between the Nikkei average's current trading level and its historic advance into uncharted territory had narrowed to just over 7%, but if the market is in this mood, the gap will be much smaller in January. It is possible that it will be resolved before the end of the term. .
Inevitably, there will be some confusion around here. And all eyes are on both how Japan got here (back) and how much it would mean for Japan if Japan's stock market finally breaks out of that bubble. ing. Less focus is on China's potentially pivotal role in all of this. A major new study of Japanese companies suggests they may be ahead of the market in realizing this.
The Japan-specific reasons that the 1989 bubble highs were within reach were growing throughout 2023. Bank of America's latest survey of global fund managers confirms that a positive number of asset allocators are starting the year with an overweight in Japanese stocks in their portfolios. The legitimacy is that it seems like it will continue.
This optimism is fueled by the return of inflation and wage growth for the first time in nearly 20 years, the continued weakness of the yen, and the fact that (in the wake of the January 1 Noto Peninsula earthquake) there are now This is due to factors such as the outlook for more modest interest rate hikes. There is also a widespread recognition that, thanks to the efforts of the Tokyo Stock Exchange, an increasingly shareholder-friendly attitude is taking root in more listed companies than ever before.
It is also important that the government called on the people to join the Break Down the Bubble Party. Starting January 1, Japanese individuals who hold about 1,113 trillion yen ($7.5 trillion) of the nation's household assets in cash will be able to invest up to 18 million yen each in tax-sheltered accounts. Become. Brokers say they will be more likely to entrust their savings to the stock market once the 1989 high is surpassed and the demons of that era are definitively exorcised.
But there are many possibilities that China, whose population is currently shrinking and whose economic growth is one of the slowest in decades, could act as both a catalyst and a decelerator for Japan's bubble-busting ambitions. .
One clear positive is that Japan is now more viable than in many years for global investors who are unwilling (for economic reasons) or unable (for geopolitical reasons) to invest in China. This means that it has become an alternative destination.
Buying Japan as Asia's most liquid “non-China” trade remains a legitimate strategy, fund managers say. On the other hand, the Japanese market is (so far) driven by interesting indigenous factors, while the Chinese market is collapsing. Meanwhile, analysts say many Japanese companies are better positioned to benefit from China's unexpected rebound than their U.S. and European counterparts through historic investment strategies, making it a two-way bet. That's what it means.
Another factor that could benefit Japanese companies is China's lead in electric vehicles, combined with its massive overcapacity and investment challenges. China's pioneering EV makers are sharing their successful strategies and technologies with the world, only to find themselves locked in a price war that is putting some companies out of business. For Japanese automakers, now might not be the worst time to sit back and take notes.
On the downside, Japan's exposure to China, particularly the triple crisis of real estate, youth unemployment, and the consumer crisis, could be a major drag. If China's manufacturing overcapacity ends up exporting deflationary pressures to the rest of the world, as economists increasingly predict, Japan's wage-boosting inflation may be in its infancy and short-lived.
A survey of more than 1,700 Japanese companies released this week by the Japan Chamber of Commerce and Industry in China provides useful background on the questions investors should be asking as Japan approaches the magic number of its 1989 bubble. ing. 51% say China is their most important market or in their top three markets, and 78% say they are better or no worse off than local Chinese companies when it comes to Chinese policies and regulations. About 39% expect China's economic situation to worsen in 2024, while a quarter expect some improvement. In 2023, only 15% of Chinese companies increased their capital investment, while 25% actively reduced it.
Investors may see fate knocking on Nikkei Shimbun's door. Japanese companies understand that the bursting of China's bubble could further delay Japan's ability to eventually forget its own bubble.