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Kavan Choksi Discusses Why Japanese Stock Prices are Rising

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The bull run of the Japanese stock market may make the Nikkei 225 cross its all-time high levels. So far, Japanese shares have been flourishing. The major equity indices of Japan, the Topix and the Nikkei 225, both hit their highest levels since 1989 in the May of 2023. Nikkei 225 all-time high level of 38915 was reached on December 29, 1989. Kavan Choksi underlined that in 2023, gains for Japanese equities ended up outpacing other developed markets.  Nikkei 225 was already up by 20% over the last one-year and the index has gained over 24% in 2023.

Kavan Choksi talks about the flourishing stock market in Japan

International investors are gearing up to increase their exposure to Japanese stocks. Many of them are considering including Japanese stocks in their portfolios for the first time this year, as the stock markets of the nation have managed to reach levels not seen since 1990. There are many reasons why the third largest economy in the world is experiencing inflation that reached a four-decade high in February and continues to run hot. Even though sharp price gains are rarely desires, Japan is more of an exception due to the bouts of deflation it has experienced since the late 1980s and early 1990s

The stock market of Japan is not celebrating the return of inflationary winds in the economy. Core consumer inflation in Japan rose beyond expectations in May 2023, as the index that excludes fuel costs had its strongest annual growth in 42 years.

As a country, Japan has been grappling with a persistent issue of low inflation and deflation for several decades. There are many reasons for this. First of all, the country has an aging population and a declining birth rate. This has led to a shrinking workforce and reduced consumer spending. As fewer people enter the workforce and spends less, the demand for goods and services is also lower, thereby causing a stagnation in prices.  Japan has experienced prolonged periods of economic stagnation which is characterized by weak consumer and business spending, as well as sluggish growth. Japan also has one of the highest debt-to-GDP ratios among developed countries. Its government has implemented certain accommodative monetary policies to seamlessly manage this debt burden. These policies range from quantitative easing to low-interest rates. However, even though these policies are aimed at stimulating economic growth, it has not managed to translate into significant inflationary pressures.

The year of 2023 witnessed a difference, as the stock markets of Japan rose to a level not seen since 1990 when the country was in the midst of its “bubble economy.” Kavan Choksi mentions that the rise this time is not the same as the last. There are several “structural changes” in Japan, yet real estate prices in the country have not increased dramatically nationwide. A market pullback or correction might however not be ruled out as many experts anticipate a strong long-term investment case for Japan.

To an extent, the rise of the stock markets in Japan can be attributed to the focus on corporate governance. Management teams across the country are undergoing a notable shift in their mindset and responding more genuinely to shareholder activism, under mounting pressure from both domestic and international investors. Moreover, listed businesses have achieved financial results that went above expectations, partly owing to a weakened yen. This depreciation has made Japanese products relatively cheaper than their competitors, leading to stronger economic performances for Japanese companies in foreign markets.

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