The Nikkei 225 — an oddly constructed index that covers the 225 largest Japanese companies — is back at levels not reached since 1989.
The Nikkei 225 JP:NIK rose 2.2% on Thursday to close at 39,098.68, surpassing its December 1989 peak of 38,916.
“Although the recent push to these levels has been rapid, we do not view this as a mountain climb to the top where the next stage is how to manage the downside,” said Morgan Stanley strategists led by Jonathan Garner, dating back to 1989. He will write down the closing prices of Eurobonds from London and fax them to Tokyo.
Morgan Stanley analysts noted that the profits of the main division-based group of companies jumped 20% year-on-year. Meanwhile, data from Société Générale shows that Japan is the only country where earnings per share estimates are rising for this year and next.
This is impressive considering that there is no clear driver of earnings growth like the AI that has powered the likes of Nvidia (NVDA).
And Super Micro Computer SMCI,
Curiously, many of Berkshire Hathaway's holdings, including the Mitsubishi 8058,
mitsui 8031,
marubeni 8002,
Sumitomo 8053,
– all of which were excellent investments for the Warren Buffett-led company – represent the biggest drag on Japanese profits.
Japan has pushed companies to adopt corporate governance reforms, sending share buybacks to record levels, while the country's central bank is considering exiting a negative interest rate regime amid signs it may escape deflation.
Analysts note that the Nikkei, like the Dow Jones Industrial Average, is a price-weighted stock index, which leads to some unusual results. Highest weight in the index, Fast Retailing 9983,
It is actually the seventh largest company by market capitalization; The largest company, Toyota Motor TM,
It is No. 15 in the Nikkei Index by weight.
More broadly, and one might say naturally, the Topix JP:180460-based index is still about 8% away from its peak. US-based investors have been better off staying home over the past 52 weeks, with the S&P 500 SPX up 24%, compared with an impressive 20% rise for the iShares MSCI Japan ETF EWJ..
There are risks, of course.
Japanese companies, which have adapted to a weak domestic economy, are highly exposed to both the United States — not a problem at the moment — and China, which is struggling with mounting debt burdens like Japan. There is also the yen USDJPY,
Which could rise in value if the Bank of Japan raises interest rates, which could make Japanese exporters less competitive.
