Japanese stocks are soaring. What is behind the peak?

Font size

Japanese stocks hit their highest level in 31 years on Tuesday. Certainly, global markets are in a good mood as investors remain optimistic about the ongoing economic recovery. But the world economy is also good for Japan.

The

Nikkei 225

Up 714 points or 2.7%, Tuesday. The index was 27,568 and briefly hit 27,601, the highest level the index has reached since 1989.

Other global stocks fell on Tuesday, but less so. The

Asia Dow

index closed 1.6%, the

Hang Seng

Index rose 1%, and the

Stoxx Europe 600

index rose almost 1%. The US stock market has been on track over the past several trading sessions, but paused briefly on Tuesday with the

Dow Jones Industrial Average

about 100 points lower in the afternoon trading. As Covid-19 cases continue to increase around the world, tax incentives are supporting consumers and businesses, and several biotech companies are moving towards mass distribution of vaccines.

But a few recent developments stand out for the Japanese economy and markets. The companies on the Nikkei are exposed to the right regions and sectors to benefit from the developments.

Tax incentives in key areas around the world are gaining momentum. The US has passed a $ 900 billion tax incentive bill that will provide assistance to individuals and small businesses. South Korean President Moon Jae-in confirmed that a third round of direct payments worth 9.3 billion won, or about $ 8.5 billion, would be paid to individuals and small businesses in January. Companies on the Nikkei 225 get an average of about 13% of their sales from the US and 2.8% from South Korea.

That is more visible than other indexes around the world. Companies on the Hang Seng index get 3% of revenues from the US and almost nothing from South Korea. Stoxx 600 companies make nearly 20% of US sales, but only about 8% of the index is consumer discretionary, which will benefit as the economy recovers and consumers return to pre-pandemic levels – or higher – of spending . That exposure is another key for the Nikkei: about 18% of Nikkei 225 companies are consumer discretionary.

Additionally, Japan is an export-oriented country that wants its currency to be relatively weak in order to make its exports globally competitive. However, the yen has strengthened against the dollar and the renminbi, both of which are used to buy Japanese exports. Still, the currency’s headwinds for Japan are offset by the revitalized global economic climate, Quincy Krosby chief market strategist at Prudential Financial said. Barron’s.

Japan’s recent strength has attracted notable investors. For example, Warren Buffett made a surprise land bet in September.

Jim Rogers, a Singapore-based investor who co-founded the legendary Quantum Fund with George Soros, called Japan’s monetary policy a major force in the country’s bull market – a view he reiterated on Tuesday. “The head of the Bank of Japan goes to work early every morning like a good Japanese bureaucrat and prints money as quickly as possible (‘unlimited’ is his word). He then buys stocks, bonds and ETFs as soon as possible, ”Rogers wrote in an email. He said he owns Japanese ETFs.

Rogers says it helps that Japan has a new government headed by Prime Minister Yoshihide Suga. “New governments are always doing things to make people happy. This one is no different. “

Write to Jacob Sonenshine at [email protected]