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Japan
OpinionComment
Nicholas Spiro
Nicholas Spiro

Macroscope | How rising China risks are driving Japan’s stock rally as investors look for safer alternatives

  • Japanese stocks have had many false dawns in recent years, but the latest upswing comes as several factors suggest this time may be different
  • Japan is also the only market in Asia big and liquid enough to offer an alternative to China while still providing exposure to the reopening of its economy

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A stock monitor in Tokyo shows the Nikkei 225 topping 30,900 on the morning of May 19. The index hit a 33-year high on May 22, reaching levels not seen since the bursting of the asset-inflated bubble economy in the early 1990s. Photo: Kyodo
Nicholas Spiro
For a sign of how Japan has yet to fully recover from the bursting of its epic 1980s asset bubble, look no further than the Nikkei 225. More than three decades after the bubble popped, the stock index – one of the two main gauges in Japan – is still down around 20 per cent from its peak, despite having experienced a strong recovery since 2012. By contrast, the benchmark S&P 500 index is up about 1,200 per cent since January 1990.
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Many years of false dawns in Japanese equities have caused even the most optimistic investors to doubt whether any rally will prove durable. Yet, the latest upswing comes when several crucial domestic and external factors are working in Japan’s favour, giving hope to fund managers that this time is different.

On Monday, Japanese stocks reached their highest level in 33 years, taking the Nikkei 225’s gains so far this year to 17.5 per cent, making it one of the world’s best-performing markets. The rally has been driven by a sharp rise in purchases by foreign institutions, which have bought a net US$44 billion since the start of April. A large portion of the inflows, moreover, are longer-term investments as opposed to speculative money.

There are several explanations for the outperformance of Japanese shares. One is a drive to improve corporate governance, spearheaded by the Tokyo Stock Exchange which signalled that the bourse would push firms to improve shareholder value.

Another is that Japan appears to have finally banished the scourge of deflation that plagued the country for decades. A gauge of consumer prices, excluding energy and fresh food, stood at 3.8 per cent last month, a four-decade high. Moreover, there are signs of elusive wage growth, with unions and their employers reaching a deal to raise wages by an average of 3.8 per cent, the most since 1993.

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Japan’s small-sized firms struggle to offer higher pay to keep up with inflation

Japan’s small-sized firms struggle to offer higher pay to keep up with inflation
However, the explanation with the most resonance for investors is Japan’s role as a safe haven in an increasingly risky world. This has taken on added significance because of concerns about the deepening geopolitical rift between the US and China, as well as economic and regulatory risks in China itself.
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