Japan’s Stock Market Hits 34-Year High Amid a Weakening Yen
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Japan’s Stock Market Hits 34-Year High Amid a Weakening Yen

Amidst Japan's soaring stock market, fueled by a weakening yen and bolstered by strong corporate performances, investors are left wondering if this resurgence marks the dawn of a new economic era.
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Amidst the buzz of global financial markets, Japan’s stock market is staging an impressive comeback, leaving investors intrigued about the underlying factors driving this resurgence. The Nikkei share average recently soared to its highest level since January 1990, marking a significant milestone as it climbed 2.12%.

What’s particularly striking is the symbiotic relationship between Japan’s stock market rally and the weakening yen, which traded around 149.47 against the dollar during the session. This dynamic benefits exporters and injects momentum into Japan’s economic landscape.

As investors ponder the implications of this trend, a compelling question emerges: Could Japan be on the brink of becoming the next Asian growth story? Let’s delve deeper into the intricacies of this unfolding narrative.

Japan’s Stock Market Hits 34-Year High

On Tuesday, the Nikkei share average closed at its highest level since January 1990, reaching 37,963.97 points after climbing 2.12%. The rally was led by Tokyo Electron Ltd, which surged 13.33% to emerge as the top performer. Other significant gainers included Tokio Marine Holdings and MS&AD Insurance Group.

The broader market received a boost from Wall Street’s strong performance and a weakened yen, which traded around 149.47 against the dollar during the session and benefited the country’s exporters. Of the Nikkei’s 225 constituents, 196 advanced while only 26 declined.

The Nikkei’s Topix index also joined the broader rally on Tuesday, gaining 2.12% to reach its highest level since January 1990, 37,963.97. Other significant gainers included Tokio Marine and MS&AD insurance groups, which climbed over 10% each. Analysts at J.P. Morgan raised their 2024 outlook for Japanese equities, projecting the TOPIX to hit 2,650 and the Nikkei 225 to reach 37,000.

Effects of a Weak Yen on Japan’s Stock Market and Economy

The recent depreciation of the Japanese yen, from around 103 yen per dollar at the end of 2020 to approximately 151 yen per dollar in late 2023, has impacted various sectors of the economy differently.

The yen’s weakness historically catalyzed Japan’s post-World War II “economic miracle,” creating a moderately inflationary “high-pressure economy” that encouraged employment and technical progress. However, rapid yen depreciation has raised concerns, such as higher inflation that could prompt the Bank of Japan to consider positive interest rates. In 1985, coordinated central bank intervention via the Plaza Accord engineered a significant yen appreciation, hampering Japan’s export competitiveness.

The yen’s prolonged weakness against the dollar has created divergent effects across Japan’s economy. Although challenging for some industries like academic research due to higher local costs, the depreciation has benefited tourism by making the country more affordable to foreign visitors.

Weakness in the yen fueled Japan’s rapid post-war growth by promoting exports and creating a “high-pressure economy.” However, past currency spikes engineered by agreements like the 1985 Plaza Accord proved detrimental. As today’s rapid depreciation risks higher inflation, the Bank of Japan may need to pivot from monetary easing policies, which have supported growth, to more hawkish interest rates.

Could Japan be the Next Investment Hotspot in Asia?

Japan’s stock market is experiencing a resurgence, with the Nikkei 225 index approaching its 1989 record high after gaining over 30% in the past year. This contrasts with China, where recent lows are reminiscent of a 2015 crash and Hong Kong’s Hang Seng Index underperforming in 2023. A shift in investor perception between the Asian giants is occurring amid global unpredictability.

Foreign capital inflows reversed December’s $3.6 billion outflow, injecting $2.6 billion last week and $6.5 billion the week prior. Japan’s success has been attributed to a weak yen benefiting exporters, corporate reforms enhancing shareholder rights, and rising inflation signaling economic momentum after years of deflation.

After years of overlooking Japan, investors take renewed interest as its structural improvements align with cyclical factors. China’s challenges present an opening, as Japan appears poised to enter a new high-growth stage.

Do you think Japan’s stock market will continue its rally this year? Let us know in the comments below.