The Nikkei 225 Stock Average of Japan surged past the significant milestone of 40,000 for the first time, indicating potential for further gains in its remarkable rally.
On Monday, the blue-chip index climbed as high as 1% to reach 40,301.30, marking a fresh intraday record. Notably, technology shares, which have been instrumental in driving the market higher over the past year, led the gains, with Advantest Corp. among the standout performers.
While the broader Topix index also advanced, it remains approximately 6% below its all-time high set more than three decades ago, before Japan’s asset-price bubble burst. Both the Nikkei and the Topix received a boost from robust US consumption data, reinforcing expectations that the Federal Reserve could potentially cut interest rates as early as June, which would bolster global sentiment.
Charu Chanana, a strategist at Saxo Capital Markets based in Singapore, commented, ‘The Nikkei 225’s breach of the 40,000 level is undoubtedly a significant psychological milestone, which could pose some resistance for the index and introduce volatility. However, given the favorable structural factors and continued weakness in the yen, it is more likely to be interpreted as a bullish signal rather than fueling concerns of Japanese stocks being overbought.
Last month, the Nikkei index surpassed its 1989 peak, as investors worldwide flocked to Japan’s largest companies driven by improving shareholder returns, a weaker yen, and surging corporate profits.
Warren Buffett’s endorsement of Japanese trading houses last year instilled confidence in the nation’s market, while concerns over a slowdown in China prompted many funds to shift their focus to Japan.
Following its milestone on February 22, the Nikkei experienced subdued movements as profit-taking occurred and some analysts expressed surprise at the rapid pace of the rally. However, downside was limited as investors seized opportunities to buy on dips.
Foreign investors remain bullish on Japanese stocks, with BlackRock Inc. and Amundi Asset Management expecting continued earnings growth and improvements in corporate governance.
Nevertheless, there are concerns about potential overheating in the stock market.
Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank, noted, “While the Nikkei 225 reaching 40,000 is a significant milestone, the speed of its ascent and the timing may outpace the actual performance of the economy and companies. Economic growth is akin to a marathon, and the stock market’s rapid rise may lead to exhaustion soon.”
Encouraged by the Tokyo Stock Exchange, companies are publishing reports outlining their plans to enhance equity valuations. Some have announced share buybacks and dividend increases, while management buyouts and activist investor campaigns are gaining momentum.
Approximately one-third of Nikkei companies, excluding the financial sector, have a net cash position, indicating they have more cash than debt. This trend, which is double the comparable figure for the S&P 500, supports the efforts of activist investors and the Tokyo Stock Exchange.
“This is not merely a speculative frenzy,” remarked Masahiro Yamaguchi, a senior market analyst at SMBC Trust & Banking Ltd., citing the robust economic and corporate environments in both Japan and the US.