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Towns and cities across Japan are still filled with distinctive and fantastical buildings from the bubble era, each a testament to how surplus and vitality passed through the ages once the fuel was used up. I am.
These were built in the late 1980s, when Japan was at its bubbly. More than enough to give ordinary Japanese a daily visual reminder of what cheerful optimism looks like, and the opposite as the building has aged over his 30 years. Things are left behind.
The failure of the flawed but widely supported Nikkei 225 stock average to regain its 1989 high over 34 years has played a similar role in keeping the trauma of the bubble permanently out in the open. , which prevented a clean psychological exit from the episode.
This week, Japanese stocks finally surpassed their peak (in nominal terms) after rising 17.5% this year. The big question now is whether this will truly be perceived by patient Japanese citizens as heralding the end of the post-bubble era. And if so, whether Japanese households decide it's time to allocate some of their $7.7 trillion in cash to domestic stocks, which again look cheap compared to U.S. stocks. According to estimates by the Bank of Japan, only 13% of household liquid assets in Japan are held in stocks, compared to more than 40% in the United States and 21% in Europe.
Indeed, amid this week's excitement, traders, brokerage directors, analysts, and market historians were all eager to identify the “psychological barrier” that had been broken. However, it may take more time to confidently call this the beginning of a new era of domestically-led investment.
The general reluctance of Japanese households to actively invest in their country's stock market has been a hot topic of debate for many years. Many explanations are plausible, but the simplest is the dampening effect of that high-profile Nikkei 225 chart, which shows Japanese stocks falling in value over a 34-year time frame.
Despite significant efforts to convince them that the risks and rewards are now more than acceptable, household investment disengagement persists to a significant extent. The Tokyo Stock Exchange has embarked on an initiative to increase corporate transparency and focus more on improving corporate value. Securities companies are heavily marketing tax-sheltered Japanese personal savings accounts, and the government has made it possible for individuals to invest more capital starting in early 2024. And for most of the past decade, the Bank of Japan has periodically entered Japan's stock market to buy stocks. If stock prices drop significantly in the morning, I will invest in TOPIX and Nikkei ETFs in the afternoon.
On the corporate side, the government has promoted governance reform for companies and stewardship reform for institutional investors. Companies are often becoming leaner, more global, and more profitable. A temporary increase in domestic mergers and acquisitions may be just beginning to create a market for corporate control that has long been absent. Stock buybacks are at record levels. And CEOs are becoming more aware of the need to focus on core operations.
There were also macro factors that theoretically pushed Japanese household assets into Japanese stocks. A weaker yen will contribute to the profits of many Japanese companies. China is now a far less easy destination for global funds, and interest in Japanese stocks is growing.
The return of sustained inflation to Japan for the first time in decades has already proven crucial. Companies appear poised to raise wages in a way that could reheat tepid consumer confidence. And in theory, rising prices should encourage Japan's growing population of retirees to seek the easily available yields on domestic stocks.
Of course, foreign investors are strongly attracted to this large confluence of factors. Foreign investors poured a net $43 billion into Japanese stocks in 2023 and were eager buyers in the first few months of 2024. On the other hand, Japanese individuals have not yet embarked on this investment. feed.
Official data on utilization of the newly expanded NISA program from January to March won't be available until May, but two trends are already clear. Net inflows into equity funds amounted to $9.3 billion in January, the majority of which is believed to have come from NISA. Since then, brokers say the overwhelming amount of money (some estimates as high as 90%) has gone to funds that track global stock markets, particularly the U.S. S&P 500 index.
In other words, Japanese households are keeping an eye on their favorite Nikkei Stock Average heading for a peak and still deciding that the long-term shape of the US benchmark is the right one to bet on. However, ironically, the rise in US stocks will push up the Japanese market. This contradiction may provide the incentive that sooner or later Japanese individuals need to start trusting the tailwinds behind their market. In the long term, they will be looking for reassurance that Japanese stocks have indeed emerged from the post-bubble era.
leo.lewis@ft.com
