Historic Rally for Japan's Nikkei 225

Things seem to start looking ahead for both China and Japan, after quite a rocky patch.

Last week, we have reported that Japan’s economy was doing much better following BoJ’s Board Member hinting at the possibility of ending the negative interest rate policy in the country.

More to the story here.

Asian stocks were mostly higher Monday ahead of China’s top annual political gathering, with Japan’s benchmark surpassing the 40,000 level for the first time driven by a surge in technology shares.

Main stock market index of Japan had exceeded its all-time-high around two weeks ago.

• Japan’s Nikkei 225 Stock Average climbed above the psychological level of 40,000 for the first time, opening the door to further gains in what seems to be a historic rally.

• After five consecutive weeks of gains, the index smashed through the fresh intraday peak of 39,990.23 hit on Friday and rose as high as 40,314.64 before momentum eased in the afternoon session.

• The blue-chip gauge rose as much as 1% to 40,301.30 on Monday – a fresh intraday record.

What is Driving This Rally?

The Japanese equity market has now reached a new high, almost 35 years later. The ongoing “rally” has made Japanese stocks some of the most sought to buy during the past year.

Japan’s GDP in dollar terms rose from 3.1 to 4.2 trillion dollars, signalling that the equity market is starting to align with the overall economic growth – giving an advantage to the country as a whole.

However, what factors are coming into play?

1. Rise in Earnings and Wages

Goldman Sachs analysts believe that optimism concerning corporate earnings in Q4 2023 were 45% higher on-year. Increasing wages amidst a tight labour market by many companies – Toyota and Nintendo for example – has additionally boosted confidence in the economy.

2. Nikkei 225 Sees Stock Inflow Due to Increased Cash

Foreign cash continues to pour into Japanese stocks as investors capitalise on the cheap yen and corporate governance reforms. This is translating into increased inflows of cash.

3. The China Effect

As China experiences a rapid unravelling, foreign investors are starting to withdraw funds, which in turn is reflecting into Japanese stocks as significant influx.

This has boosted liquidity in Japanese markets, contributing to the rise in benchmark indices.

Nikkei 225 Index Rally to Continue?

Nikkei seems to have found support from US consumption data, which adds expectations that the Federal Reserve might start cutting interest rates as early as June.

With Japan’s inflation falling to a 22-month low, foreign investor sentiment remains bullish on Japanese stocks. Still, there are some concerns the stock market may be overheating.