Japan’s Nikkei closes at two-decade high
The Nikkei Stock Average hit a two-decade closing high on Wednesday, a milestone for the nation’s long-suffering stock market, driven by stronger earnings, an improved economy and a better environment for shareholders.
The Nikkei rose 57.76 points to close at 20881.27, the highest close since 20943.90 on Dec. 5, 1996, less than a day before then-Federal Reserve Chairman Alan Greenspan sent markets plunging by questioning whether investors were suffering from “irrational exuberance.”
Some money managers say they believe Japan is finally ready to break out of a rut that is more than a quarter-century old. But skepticism about the long-term outlook remains common because of the nation’s aging population and trade-dependent economy.
Over the past 2½ decades, the Nikkei has broken above 20000 several times only to lose ground later. It has never gotten anywhere close to its record closing high of 38915.87 on Dec. 29, 1989. A previous surge above 20000 in 2015 fizzled out after fears emerged about China’s economic outlook.
In the current rally, as in previous cases, Japan is lagging global peers such as the U.S., where stock prices have already set records this year.
While some investors are drawn mainly by Japan’s low valuations, changed corporate behavior and signs of a longer-term economic pickup are also attracting global money managers.
Pretax profits at Japanese companies, excluding financial firms, increased 23% from a year earlier to a record ¥22 trillion ($196 billion) in the April-June quarter, according to the Ministry of Finance. Companies are taking shareholder-friendly moves such as bringing in more independent directors and buying back shares.
Dariusz Czoch, who helps manages about $3 billion in international equities at Federated Investors Inc., said tight labor markets in Japan appear to be generating higher wages for temporary workers.
“In the past it was difficult for us to invest in Japan because of lack of transparency and corporate governance issues, and also the country itself for the last two decades was quite difficult … because of deflation,” said Mr. Czoch. “We are changing our mindset.”
He said his team has been spending more time on Japan and gradually increased the weighting of Japanese shares, with holdings including small-motor maker Nidec Corp. and factory-automation specialist Daifuku Co.
Prime Minister Shinzo Abe, who is one of postwar Japan’s longest-serving leaders with nearly five years in office, has helped push markets up by encouraging loose monetary policy. The Bank of Japan’s annual ¥6 trillion purchases in exchange-traded stock funds provide a steady source of buying through market ups and downs.
Still, the Japanese economy underpinning the Nikkei remains shaky, especially because wages haven’t grown broadly enough under Mr. Abe to spark solid consumer spending.
Money managers said there was little exuberance in the market despite the two-decade high, and volume has been lackluster. Takashi Hiratsuka, trading group leader at Resona Bank’s asset management division, said favorable machinery orders Wednesday helped nudge the market up but uncertainty remained over Japan’s Oct. 22 election and North Korean aggression. “We can’t be fully optimistic,” he said.
And equity returns, while improved, trail the U.S. and Europe. According to Nomura Securities, return on equity for Japanese companies—a common measure of how efficiently they’re using their funds—averaged 9.8% at the end of September, based on expected earnings in the following 12 months. That is up from 8.1% five years ago but still below 17.7% in the U.S. and 12.5% in Europe excluding the U.K.
David Ragan, who manages 15 billion Canadian dollars ($12 billion) in international equities at Calgary-based Mawer Investment Management Ltd., said many Japanese companies fell short and his fund remained underweight on Japanese shares as it has been for three decades.
“We still do see fairly significant difference in governance quality and management quality in Japan,” Mr. Ragan said.
Alison Kennedy, governance and stewardship director at Aberdeen Standard Investments, said her firm wanted companies to appoint more independent directors and spread out their annual meetings instead of concentrating them in a one-week period in June.
Simon Webber, a London-based global equity fund manager at Schroders PLC, said change is “modest and measured in a way I would have expected of a very strong culture like Japan. But I think we are seeing progress.” He said his team liked companies such as Bridgestone Corp., which announced a share buyback of up to ¥150 billion earlier this year.
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