Japanese stock market reaches 30 year high as it outpaces the S&P 500

The Japanese stock market climbed above 30,000 last week. Although it remains well below its all-time high of 38,597, it was, nevertheless, a psychological milestone not breached by the Nikkei 225 in more than three decades.

The previous high was reached in August 1990, when Japan accounted for more than one third of the world’s stock market capitalisation*. Real estate prices had experienced exponential growth, and the land underneath the Tokyo Imperial Palace was famously worth as much as the entire state of California. The property-fuelled bubble then burst, and the stock market crashed in spectacular fashion, plunging 50% from its peak, and bottoming at around 15,000 in 1992. It has spent the past 30 years recovering.

Japan outpaces the US in 2020

Among the world’s developed markets, the Japanese stock market has been the top performer since the coronavirus began to take hold a year ago, but it has gone largely under the radar, as investors have focused instead on the US and the technology giants.

Since 19 February 2020, the Nikkei 225 has risen 24.5%^ in sterling terms, compared with 6.6%^ for the S&P 500, 3.8%^ for the MSCI Europe ex UK, and -8.3%^ for the FTSE 100.

After years of stagnant growth, the good performance of the Japanese stock market in recent years is largely thanks to Abenomics – economic and social reforms set in place by the previous prime minister Abe Shinzo. More recently, the 30,000 milestone has been reached on the back of broadly positive economic data.

Although the Japanese economy contracted 4.8%** overall in 2020, it was one of the most resilient economies in the world last year and experienced better-than-expected economic growth in the last quarter, at 12.7%**. The UK, by comparison, saw its economy shrink by nearly 10%**.

Japanese exporters also saw an increase in orders, with the Finance Ministry saying that Japanese exports increased 6.4%** year-on-year in January, driven by a 37%** increase in shipments to China. Imports, on the other hand, decreased by about 10%**.

The question now for investors is whether Japanese equities can maintain their upward trajectory?

Valuations remain attractive

The Chelsea research team likes Japanese equities today. “The Japanese economy is doing well, politics are stable, and valuations are more reasonable than many parts of the world,” commented James Yardley senior research analyst.

“The country has almost recovered to pre-Covid levels, having coped much better with the pandemic than the UK, the US and Europe. Government measures such as cash handouts and employment protection subsidies have helped support the economy and keep unemployment low.

“Japan is traditionally quite a cyclical economy, with big industries such as car manufacturing, and it is poised to do well from a global recovery.”

Ryan Lightfoot-Brown, senior research analyst, added: “As James has said, Japan's fortunes are linked to a global recovery. But it has just signed the Regional Comprehensive Economic Partnership with its Asian neighbours, a wide-ranging pact with the UK, and, in 2019 a similarly broad agreement with the EU. Its geographical closeness to China in particular, and the high respect for Japanese goods in the country, means Japanese equities are rightly becoming understood as a platform to invest in Asian growth.”

“At the same time, Japan's changes of regulation, governance and society itself continue, encouraged by a government which changed leadership in 2020 so seamlessly that the market barely noticed. It offers a rich hunting ground for investment opportunities.”

Japanese equity funds on the Chelsea Selection are:

• Baillie Gifford Japanese
• FSSA Japan Focus
• JPM Japan
• Jupiter Japan Income
• Legg Mason IF Japan Equity

*Source: The Economist, 2011
**Source: T. Rowe Price, weekly market recap, 22 February 2021
^Source: FE fundinfo, total returns in sterling, one year to 19 February 2021

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the Chelsea research team and do not constitute financial advice.