[Why&Next] 3 Reasons Why the Japanese Stock Market Hit a 34-Year High

Analysis of Factors Behind Japanese Stock Market Rise by Bank of Korea Tokyo Office
Improved Corporate Earnings, Continued BOJ Quantitative Easing, and Corporate Value Enhancement Measures Cited

As the Japanese stock market hits its highest level in 34 years, interest is growing in the factors behind this rise. Experts cite improved corporate earnings, the Bank of Japan's quantitative easing policy, and government measures to enhance corporate value as the main reasons for the surge in Japanese stock prices.

According to the Nikkei newspaper on the 20th, the Nikkei 225 average stock price (Nikkei index) closed at 38,470 yen. The Nikkei index surpassed 38,000 yen on the 15th, marking the highest level in 34 years and 1 month since January 8, 1990.

The Nikkei index reached an all-time high of 38,916 yen on December 29, 1989, but then entered a long-term slump following the burst of the bubble economy, falling to 7,054 yen in March 2009. However, it began rising last year, and this year alone, the Nikkei index has increased by about 14%, the highest among major countries worldwide.

On the 15th, the Nikkei 225 index (Nikkei Stock Average) is displayed on the monitor of a foreign exchange trading company in Tokyo, Japan. [Image source=Yonhap News]

Improved Corporate Earnings, Monetary Policy, and Corporate Value Enhancement Drive Stock Price Rise

The Bank of Korea's Tokyo office recently identified three main factors behind the rise in the Japanese stock market. The first is the improvement in corporate earnings. According to the Nikkei newspaper, among 207 Japanese listed companies that announced their fourth-quarter results by the 8th, 121 companies, or 58.5%, posted earnings surprises exceeding expectations.

In particular, semiconductor-related companies such as Tokyo Electron, SoftBank, and Advantest, which are expected to benefit from increased demand in the generative artificial intelligence (AI) sector, have led the stock price rise. The improved earnings of large companies like Toyota and Fast Retailing also contributed.

As corporate earnings improved, foreign investors continued buying stocks. Foreign investors net purchased 2.069 trillion yen (18.4312 trillion won) worth of Japanese stocks in January, marking the seventh-highest monthly level since 1982.

The second factor is the expectation that the Bank of Japan will maintain its accommodative monetary policy, which has improved investor sentiment. Although the Bank of Japan is expected to end its negative interest rate policy this year, a loose financial environment is anticipated to continue.

Bank of Japan Governor Kazuo Ueda stated at the House of Representatives meeting on the 16th, "Even after lifting the negative interest rate, it is highly likely that the accommodative financial environment will continue for some time." Deputy Governor Shinichi Uchida also said, "Even if the negative interest rate is lifted, it is difficult to consider a path of steadily raising interest rates." Following these remarks by Bank of Japan officials, the yen weakened, positively impacting stock prices.

Lastly, expectations for improved capital efficiency in companies continue. The office evaluated that the Tokyo Stock Exchange's ongoing requests to listed companies to pursue corporate value enhancement measures, and the companies' active responses, have positively influenced stock prices by raising expectations for changes in corporate governance.

The Tokyo Stock Exchange strongly requests companies with a price-to-book ratio (PBR) below 1 to disclose management improvement plans and encourages them to enhance capital profitability through share buybacks or increased dividends.

Following the exchange's requests for capital efficiency improvements for companies with a PBR below 1, actual share buybacks and shareholder returns have increased, and the PBR of listed companies has improved. Based on companies with March fiscal year-ends, 59% (673 companies) have initiated (including under review) corporate value enhancement measures, nearly doubling from 31% in July 2023.

On the 16th, pedestrians are passing in front of the stock market status board in downtown Tokyo, Japan. [Image source=Yonhap News]

Among the Three Reasons, Tokyo Stock Exchange’s Corporate Value Enhancement Measures Had the Greatest Impact

Among the three reasons, some evaluations suggest that the Tokyo Stock Exchange’s corporate value enhancement measures had the greatest impact. Ryushiro Kodaira, senior reporter for the Nikkei newspaper, assessed at a Korea Corporate Governance Forum seminar held in Yeouido, Seoul, that the Japanese stock market has grown based on the PBR reforms implemented by the Tokyo Stock Exchange since last year.

Kodaira cited three reasons why the exchange’s PBR reform measures succeeded: the Japanese cultural emphasis on saving face, the tendency of latecomers to faithfully follow best practices, and the exchange’s enormous influence.

He said, "In Japan, when a company in the same industry announces a good plan to enhance shareholder value, other companies in the same sector follow suit. Otherwise, they lose face. The exchange has effectively captured this corporate practice and encourages (corporate value enhancement)."

The Bank of Korea’s Tokyo office sees potential for further rises in the Japanese stock market but also notes risks. First, the Bank of Japan might raise interest rates faster than expected.

An official from the office explained, "If the Bank of Japan shifts its monetary policy to continuous rate hikes after lifting the negative interest rate, it could burden companies with increased interest payments." They added, "If U.S. inflation accelerates again, delaying the possibility of policy rate cuts or reversing expectations of a soft landing in the U.S., the U.S. stock market could enter a correction phase, negatively impacting the Japanese stock market."