How Japan overcame decades of stagnation and broke stock market records

After 34 years of stagnation, the Japanese stock market is finally waking up and happier times are coming.

On . On Thursday, the benchmark Nikkei 225 index of the nation's largest companies closed 2.2% higher at 39,098.68, finally surpassing the previous record set in 1989.

For an economy that has long struggled returning to its former glory was a major milestone in the country's recovery.

Technology has come a long way since the Japanese market last reached its peak, when Japanese companies released Gameboys, massive computers and Walkman stereos.

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Its previous success was such that in 1989 Japan accounted for almost two-fifths of the world's reserves, well ahead of competitors such as the United States.

However, soaring stock prices caused the asset bubble to burst spectacularly, leaving one of the world's richest countries stuck in the throes of falling prices and low growth for decades.

The fact that the stock market has now eclipsed its 1989 high, raising hopes of a long-awaited comeback. But many are still cautious.

“Psychologically, this is an important moment,” says Dan Boardman-Weston, chief executive of BRI Wealth Management.

“An entire generation of investors was likely traumatized by the brutal sell-off in Japanese equities in the 1990s and 2000s, reaching the market bottom only in 2009. But I think the fundamentals have actually changed dramatically over the last decade.”

The Nikkei 225 Index is up more than 17% this year, making it the world's best-performing major index.

Its latest rise comes as US chipmaker Nvidia beat expectations on Wednesday as its revenue rose 265% to more than £17bn.

Pantheon Macro Economics' Duncan Wrigley says artificial intelligence developments intelligence led to a sharp rise in global technology stocks.

“The generative AI boom is particularly driving demand for high-quality chips, and Japanese companies have a strong position in this sector. supply chain,” he says.

“There are companies like Nikon that make some of the semiconductor manufacturing equipment, and there are others that make some of the materials.”

As for the economy Overall, the latest stock market breakout will raise questions about whether Japan's chronic deflation problem may be going away.

The problem of falling prices has come to epitomize the problems the country has faced over the past three years. decades as stagnant wages cut household spending and slowed economic growth.

As a result, Japan's central bank carried out several rounds of digital money printing, known as quantitative easing, and set negative interest rates. over the past eight years.

However, despite the newfound optimism, many analysts fear that the Japanese economy has not yet emerged from the crisis.

“I think the hype is getting a little overblown,” says Rupert Thompson, chief economist at investment firm Kingswood Group.

“The Mistake of the Last 10 It took years to jump on any of these bandwagons, only to discover that it was in fact another false rally.»

The stock market received support from a weak yen, which fell more than 10% against the dollar. and pound for the last year.

But with the central bank expected to begin tightening its monetary policy, Thompson says the yen is unlikely to fall further.

Wrigley is equally realistic: “I feel like the stock market has pulled ahead.” economy in the case of Japan. Much of the domestic economy is still in a rather sluggish state. The manufacturing sector has seen a decline in activity.»

Japan's economy unexpectedly fell into recession late last year, losing the title of the world's third-largest economy to Germany.

For investors, hope is that Japan is on the on the cusp of a return to a normal monetary environment, where consumer prices are rising moderately and interest rates are positive, a recession is bad news.

“This technical recession complicates expectations for the Bank of Japan to normalize its policy soon,” they say analysts at Ned Davis Research.

“Continued declines in consumer and business spending suggest demand-driven inflation will be more difficult to achieve.”