History of the Nikkei 225

The Nikkei 225 Index consists of 225 highly valuable and liquid Japanese publicly traded companies on the Tokyo Stock Exchange across a wide range of industries. A milestone was its December 1989 high, when the index reached 38,915 points during a "bubble" in the Japanese economy, fueled by excessive investment and speculation. Following the bursting of this bubble in the 1990s, there was a long period of stagnation known as the "lost decade", during which the index declined for a prolonged period. The financial crisis of 2008-2009 further exacerbated the decline. However, since 2012, with the advent of policies that included fiscal stimulus and expansionary monetary policy, the index has started to rise again. Since the COVID-19 pandemic in 2020, the index has experienced fluctuations, but thanks to massive government stimulus measures and the continued growth of tech giants such as Sony, Toyota and SoftBank, the Nikkei 225 hit a new all-time high in March 2024, surpassing the long-standing record set in the late 1980s.*

Nikkei 225 record

On Tuesday, July 9, 2024, the Nikkei 225 index rose 1.96% to close at a new record high of 41,580 points, surpassing the high of a few months ago. The rise in technology stocks was supported by enthusiasm in the AI sector in Japan, which also boosted stocks in the US, with the S&P 500 and Nasdaq indices reaching new records. The positive sentiment was also boosted by a Nikkei Asia report that Sony and other Japanese chipmakers are planning to invest around 5 billion USD to expand their production capacity over the next 5 years.[1] In addition to the increased demand for AI chips, the expectation of a US interest rate cut in September added to the positive market developments. Another Japanese index, the Topix, also reached its all-time high on Tuesday. The immense popularity of Japanese equities is evidenced by the fact that in the last week of June, the local stock markets saw foreign investment inflows totaling 604.9 billion JPY (3.75 billion USD), the largest weekly volume since April this year.[2]

Nikkei 225 index value development over the past 5 years (Source: Google Finance)*

Topix index value evolution over the last 5 years (Source: Google Finance)*

The effect of the weak yen is helping Japanese stocks

Since the beginning of 2023, the Japanese yen has weakened significantly against the U.S. dollar, creating favorable conditions for Japanese stocks.* The weak yen effect helps exporters as their export profits increase when converted to yen. This trend has been supported by the monetary policy of the Bank of Japan (BOJ), which continues to keep interest rates low and continues to buy government bonds (Quantitative Easing), weakening the yen. The currency depreciation has boosted the profits of major Japanese export companies and boosted the stock market. This trend is expected to continue as the BoJ is unlikely to raise interest rates in the near future, which could weaken the effect of the weak yen. However, Japanese analysts expect real wages to start rising from July to September, which should support domestic demand into the second half of the year.[1][1]

The unconventional monetary policy of the Bank of Japan

At its last meeting in mid-June 2024, the BoJ left its short-term interest rates unchanged at 0% to 0.1%, as expected. Although it is unlikely to change them at the next meeting scheduled for late July, the central bank has announced a possible reduction in the volume of government bond purchases, which could stabilize the currency.Back in March, the BoJ raised interest rates from negative levels for the first time since 2007, ending an era of massive financial stimulus in the form of cheap borrowing. However, it continued to buy bonds in an attempt to stabilise their falling yields. However, these purchases weakened the yen against other world currencies. BoJ Governor Kazuo Ueda said in May that the bank would monitor the yen's development and adjust monetary policy to avoid the negative economic effects of its volatility.[2]

Conclusion

It is clear that Japanese equities are experiencing a new golden age, driven by the hype around artificial intelligence and a weak yen. The Nikkei 225 and other Japanese indices have surpassed all-time highs, reflecting strong growth and positive market sentiment. Given the continued expansionary monetary policy and expected increases in real wages, it appears that positive trends could persist in the near term. Nevertheless, further steps in the BoJ's monetary policy, which may have a significant impact on the local stock markets, should be closely watched.

[1,2] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or on the current economic environment, which may change. Such statements are not guarantees of future performance. They involve risks and other uncertainties that are difficult to predict. Results may differ materially from those expressed or implied by any forward-looking statements.

* Past performance is not a guarantee of future results.

Adam Austera, Principal Analyst at Ozios

[1] https://asia.nikkei.com/Business/Markets/Equities/Japan-s-Nikkei-average-closes-at-all-time-high-breaks-March-record

[2] https://www.cnbc.com/2024/06/14/bank-of-japan-set-to-reduce-jgb-purchases-stands-pat-on-interest-rate.html

[1] https://www.investing.com/news/stock-market-news/japans-nikkei-index-hits-record-high-above-41k-on-tech-gains-weak-yen-3510990

[2] https://www.investing.com/news/economy-news/japanese-stocks-gain-biggest-weekly-foreign-inflow-in-212-months-3508292