Could Japan's Stock Market Return to its 1989 Peak?

Could Japan's stock market return to its 1989 peak? The question echoes among investors worldwide as Tokyo's market index outperforms its global counterparts. Rewind to 1989 when Japan's stock market peaked, with the Nikkei 225 Index near the 40,000-point high. Now, after three decades of relatively subdued growth, Japan's market is meeting its renaissance moment.

Champion in the Global Markets

Japan's stock market surge crowned it the champion in the global arena during the first half of 2023. Among the 15 biggest markets worldwide, the Nikkei 225 index outshone all, soaring 27% since the end of last year — the highest in 33 years.

But what led to this resurgence? The Nikkei 225 index, starting from 40,000 points in 1990, saw a decline that lasted almost two decades, hitting rock bottom at around 7,000 points in 2009. The main reason was Japan's slow GDP growth and serious deflation. However, since 2012, Japan's nominal GDP began to grow, and over the decade until 2021, the cumulative returns of Japanese stocks surpassed even the S&P 500 index.

Reviving Tourism and Trade

Japan's reopening to international tourism has been a major catalyst. A weaker yen has made Japan an exceptionally attractive destination for foreign tourists and has boosted the competitiveness of Japanese exporters. The yen's depreciation to multi-decade lows has been a key driver of corporate earnings growth, particularly for Japan's major manufacturers.

Foreign investors, led by Warren Buffett's renewed interest in Japanese trading houses, have played a pivotal role in reigniting enthusiasm for Japanese equities. Buffett's endorsement of companies like Marubeni, Itochu, and Mitsui has drawn global attention to undervalued Japanese conglomerates with diversified global operations.

Can Nikkei 225 Return to 40,000?

The structural changes underway in Japan — from Tokyo Stock Exchange reforms pushing companies to improve ROE, to the Bank of Japan's gradual shift away from ultra-loose monetary policy — are creating a new chapter for Japanese equities. If inflation becomes sustainably embedded and corporate governance reform delivers higher returns to shareholders, Japan's stock market renaissance could be more than a fleeting moment. For Asia-focused investors, Japanese equities deserve a fresh look as a core allocation within diversified portfolios.